Fed anchors interest rates at 23-year "peak", what will happen to USD/VND exchange rate?

Fed anchors interest rates at 23-year “peak”, USD/VND exchange rate forecast to increase sharply

Last night (Vietnam time), the US Federal Reserve (Fed) announced its latest monetary policy. Accordingly, the Federal Open Market Committee (FOMC) unanimously kept the federal funds rate unchanged for the fourth consecutive time. The current interest rate is in the range of 5.25% - 5.5%, the highest in nearly 23 years.

The FOMC signaled that it was done raising interest rates. Fed Chairman Jerome Powell said policymakers are waiting for additional data to determine the direction of the trend. He also noted that a rate cut in March is “unlikely.” A rate cut would only be appropriate if they have strong confidence that inflation is falling to target on a sustained basis.

Speaking to reporters of the Journalist and Public Opinion newspaper, Dr. Nguyen Tri Hieu, a banking and finance expert, said: “As I predicted earlier, the Fed did not lower interest rates in the first quarter of 2024 because the inflation rate is still far from the Fed’s 2% target. Therefore, they still maintain their plan to control inflation by keeping interest rates high.”

Fed keeps interest rates at 23-year high, USD/VND will increase sharply — The Fed has just announced that it will keep interest rates at their highest level in nearly 23 years. The USD/VND exchange rate is expected to be greatly affected. Illustrative photo

According to Dr. Nguyen Tri Hieu, this decision of the Fed will strongly affect the domestic currency market. “When the US keeps the interest rate high, the difference between the interest rate of the dollar and the dong is very high. The interest rate here is the overnight interest rate. Our interest rate is the interest rate on the interbank market, also overnight. Compared to each other, the difference is from 5% to 5.5%. With such a high difference, this decision affects the USD/VND exchange rate. Low domestic interest rates mean low value of the dong, resulting in an increase in the exchange rate. Therefore, the Fed keeping the interest rate unchanged is disadvantageous for Vietnam in stabilizing the exchange rate,” Dr. Nguyen Tri Hieu analyzed.

Therefore, Dr. Hieu affirmed that the USD/VND exchange rate will increase, but to what extent it will increase is difficult to predict because the currency market is not only affected by economic factors but also by politics.

The exchange rate is also related to the US presidential election. The current government wants to show that it has good control over inflation, so they want to maintain it by maintaining high interest rates. Therefore, Mr. Hieu believes that the Fed will cut interest rates, but not in the near future.

“I predict that the Fed will cut interest rates in the second half of 2024. The earliest is the second quarter,” Dr. Nguyen Tri Hieu commented on the time the Fed could adjust monetary policy.

USD/VND exchange rate is in chaos

During the opening hours on February 1, the USD/VND exchange rate was "chaotic" when each bank adjusted the exchange rate in a different way. At the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), in the early morning of February 1, the USD/VND exchange rate was listed at 24,250 VND/USD - 24,590 VND/USD, down 5 VND/USD compared to the end of yesterday and also the end of January 2024.

Vietnam Technological and Commercial Joint Stock Bank (Techcombank) is listing the USD/VND exchange rate at 24,265 VND/USD - 24,572 VND/USD, down 3 VND/USD for buying and 6 VND/USD for selling.

The USD/VND exchange rate at the Bank for Investment and Development of Vietnam (BIDV) was adjusted up 5 VND/USD in both buying and selling directions to 24,270 VND/USD - 24,580 VND/USD.

Meanwhile, Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) has mixed changes to the US dollar. The USD/VND exchange rate at VietinBank is traded at: 24,250 VND/USD - 24,590 VND/USD, up 40 VND/USD for buying but down 40 VND/USD for selling.

In the free market, at Hang Bac and Ha Trung - the "foreign currency streets" of Hanoi, the USD is quite calm. The USD/VND exchange rate is commonly traded at: 24,680 VND/USD - 24,780 VND/USD, unchanged from the end of yesterday.

Commenting on this “strange” development, Dr. Nguyen Tri Hieu said that this is normal because the policy was just announced by the Fed last night so it has not yet “absorbed in”. According to Mr. Hieu, today, the USD/VND exchange rate will have many strong fluctuations.

The US dollar is “weak” in the domestic market.

The USD/VND exchange rate is expected to increase sharply after the Fed announced that it would keep the US dollar interest rate unchanged. Before that, in January 2024, the USD/VND exchange rate increased but still recorded a weaker upward momentum compared to the world market.

Specifically, in January 2024, the USD/VND exchange rate increased by 175 VND/USD, equivalent to 0.7% compared to the end of 2023. This increase is much lower than the USD on the world market.

In the last trading session of January 2024, the dollar index increased by 0.2% to 103.36 and recorded a gain of 2.3% this month, the best month since September. That means the US dollar's gain in the world market is 3.3 times higher than in the domestic market.

Traders are now pricing in a 38% chance the Fed will cut rates in March, down from 59% on Wednesday. It was down from 89% a month ago.

“Traders thought that with the shift to neutral, the Fed would accompany this shift with dovishness. But the Fed did not do that. The Fed added to its hawkish bias,” said Thierry Albert Wizman, global rates and foreign exchange strategist at Macquarie in New York.

Source