Fed interest rate hike may not affect forex

Monday, Jun 06, 2016 12:12


The United States Federal Reserve (Fed)'s interest rate hike expected this month is unlikely to have any significant impact on Viet Nam's foreign exchange rate, experts said.— Photo cafef.vn
HA NOI (Biz Hub) — The United States Federal Reserve (Fed)'s interest rate hike expected this month is unlikely to have any significant impact on Viet Nam's foreign exchange rate, experts said.

St. Louis Federal Reserve President James Bullard said on May 30 that global markets appear to be "well-prepared" for a summer interest rate hike from the Fed.

Economists also said strong income growth, together with signs the economy was picking up steam in the second quarter, could give the Fed ammunition to raise interest rates as early as this June.

In the domestic market, after keeping steady for a long time since the central bank applied the daily reference rate in January, the foreign exchange rate has seen under an upward trend for the past few days in the wake of a recent sharp yuan devaluation by 0.45 per cent and a possible Fed rate rise.

However, domestic experts said that the fluctuation of the exchange rate in the domestic market is only short-term and temporary.

Nguyen Duc Do, deputy director of the Financial and Economic Institute, said in theory, the domestic foreign exchange market could suffer pressures from the Fed rate hike and the yuan devaluation, however, in fact, the impact might be insignificant.

Besides, he said, the US dollar might not increase sharply and yuan might not devalue sharply after the Fed's rise.

"So, the domestic foreign exchange market will be stable in the context of the central bank's pledge to keep the rate steady," Do said.

Banking expert Can Van Luc said that the Fed's increase would affect Viet Nam, but it would not be significant.

Luc said the Fed's interest rate increase is already within the market's expectations. The market late last year anticipated that Fed would raise interest rates in April 2016, so if the Fed raises interest rates in June, it would come as no surprise and would not affect the domestic market as much as it did in December 2015.

Besides, Luc said, the impact would not be significant as Citibank had recently forecast that the yuan would devalue by roughly 2 per cent to 3 per cent this year, much lower than the 6 per cent to 7 per cent rate anticipated early this year.

Nguyen Van Dung, chairman of the Tan Viet Securities Company, said it would be difficult for the exchange rate to make sudden adjustments because the Fed's interest rate increase would not be large. The increase in June, if available, would be only 0.25 per cent.

Moreover, Dung said, in 2015, the State Bank of Viet Nam made a strong adjustment to the exchange rate. Besides, the new exchange rate regulation mechanism, or the daily reference rate, would also make it more difficult for the dollar speculation. Therefore, it is difficult to have sharp changes in the foreign currency market.

Many economic experts also said that if the Fed raises interest rates, the local exchange rate would be affected of course. However, unlike previously when it skyrocketed, this time it would inch up gradually thanks to the daily reference rate policy.

However, experts still suggested that the SBV closely watch movements in the global market to avoid negative impacts.

Luc said that the central bank also needs to closely monitor the movements of eight foreign currencies, especially US dollar, Yuan, Euro and Yen, which Viet Nam uses to calculate the daily reference rate.

Echoing Luc, expert Nguyen Tri Hieu also recommended to the central bank that it closely watch the market movements to take the daily reference rate policy flexibly in a move to support exports and prevent foreign currency speculation. — VNS




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