Fed’s foreseen rate cuts affect foreign exchange rate

After the Fed’s move, the US dollar index (DXY) on December 19 hit nearly 108, the highest level in the past year.

The latest US Federal Reserve (Fed)’s announcement to make fewer interest rate cut next year immediately impacted the USD/VNĐ exchange rate.

In a meeting last week, the Fed’s officials said they now foresee only two rate cuts in 2025, down from the four they envisioned in September. The US central bank is now projecting that the federal funds rate may sit at median level of 3.9 per cent by the end of 2025, up from its earlier forecast of 3.4 per cent.

After the Fed’s move, the US dollar index (DXY) on December 19 hit nearly 108, the highest level in the past year.

The Việt Nam’s interbank exchange rate on the day increased beyond the SBV’s intervention price and closed at VNĐ25,453 per dollar, bringing the total increase since the beginning of the year to nearly five per cent.

Some local commercial banks on December 19 bought the dollar from the SBV in relatively large volumes. With the purchases, it was the first time commercial banks needed the foreign currency support from the SBV in the past five months.

Previously, the SBV also had to sell a large amount of foreign currency worth about US$6.4 billion to cool down the domestic foreign exchange rate in the period from April to early July this year, the Rồng Việt Securities Company estimates.

Since the beginning of this year, the SBV has sold about $6.5-7 billion to stabilise the foreign currency market. The move has helped curb the exchange rate increase but affected the Vietnamese đồng liquidity of the banking system.

Financial expert Dr Cấn Văn Lực forecast that the USD/VNĐ exchange rate would remain stable for the foreseeable future due to three main reasons:

First, the supply and demand for the dollar in Việt Nam is relatively good.

Second, the initial excitement of investors when President-elect Donald Trump won the vote will subside and help reduce the demand for holding the dollar for speculation.

Finally, the Fed may slow the rate cut, but will continue to maintain a loose monetary policy. This will narrow the gap between the dollar and đồng interest rates, which will help reduce pressure on the exchange rate.

Lực forecast that the đồng may depreciate by only 2.5-3 per cent against the dollar next year.

This depreciation rate is acceptable in the context that the dollar is strengthening and the world economy is forecast to have many fluctuations, Lực said.

SBV’s Governor Nguyễn Thị Hồng said that the SBV is determined to manage the foreign exchange rate flexibly, in accordance with market developments. When there are large fluctuations, the SBV will consider selling the dollar to stabilise the market and meet the dollar needs of people and businesses.