Exchange rate in Vietnam to peak in Q3, to decrease thereafter: Shinhan Bank

The exchange rate in Vietnam could peak at the beginning of Q3/2024 and decrease thereafter, said Jang Young Jin, director of Shinhan Bank Vietnam's global trading center.

The current USD/VND exchange rate is being influenced in the short term by three main factors: the continued strength of the U.S. dollar globally, the cycle of raw material imports, and the cycle of profit repatriation by foreign companies, the executive said.

He clarified that the U.S. dollar would cool down as the U.S. Federal Reserve (Fed) possibly reconsiders maintaining high interest rates policy when inflation has eased. The Vietnamese foreign exchange market will be supported by inflows from exports, FDI, and economic recovery towards the end of the year, Jang Young Jin added.

Reviewing the exchange rate in May amid Vietnam’s trade deficit in the month, he emphasized that the trade deficit was expected by Shinhan Bank Vietnam because it was the annual period for importing raw materials for the production of electronic products (such as Samsung items) and for export-related products such as garments, fertilizers, and wood.

Some items for the manufacturing and processing sector recorded a significant increase in import value, such as phones and components (55.1%), iron and steel (50.1%), electronics, computers, and components (39.3%), petroleum (34.6%), raw materials for textiles, garments, shoes, and sandals (33.7%), and plastics (31.4%).

Notably, vehicle imports in May jumped 2.5-fold year-on-year, possibly because China’s electric vehicle (EV) giant BYD is preparing to sell its EVs in Vietnam, he noted.

The increase in imports of these raw materials and fuels comes as the industrial production index (IIP) continues to improve, estimated to have risen by 8.9% year-on-year in May. Among these, many export-oriented sectors saw significant growth, such as rubber and plastics (24.1%), wood processing and wood production (23%), electrical equipment (19.4%), electronics, computers, and optical products (17.4%), and apparel (9.4%).

Despite a trade deficit in May, Vietnam recorded a trade surplus of about $8 billion in the first five months of the year. However, the exchange rate is still under pressure because the surplus in the five-month period mainly came from the FDI sector, while the local sector still posted a trade deficit of about $10 billion, Jang Young Jin added.

On Wednesday, the Federal Open Market Committee (FOMC) under the Fed announced that it will maintain the target range for the federal funds rate at 5.25-5.5%. The FOMC does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%, according to the Fed’s release.

The FOMC is seeking to achieve maximum employment and inflation at a rate of 2% in the long run. It has judged that the risks to achieving its employment and inflation goals have moved toward a better balance over the past year.