The factors that increase the dong/ US dollar

01-Dec-2016 Intellasia | Bao Dau Tu | 6:00 AM Print This Post

The dong/US dollar exchange rate since the last 10 days has surged almost steadily, including the central exchange rate, listed exchange rate of banks and the exchange rate on the black market. The important factor which leads to the increase of exchange rate is the appreciation of US dollar on the international market.

Specifically, the US dollar-Index has risen from 98.63 points to 101.34 points, equivalent to an increase of 2.71 percentage points or 2.75 percent. This ratio is forecasted to continue rising as the capital flows in the world have been drawn into US dollars and into the US. Moreover, after seven years being at low level of nearly zero percent per annum and only slightly increased in the end of last year, the US dollar interest rates are forecasted to inch up in December.

The dong/US dollar has increased from 22,370 dong per US dollar to 22,690 dong per US dollar, equivalent to an increase of 320 dong per US dollar or 1.43 percent. It also means that dong has devaluated by 1.43 percent against the US dollar. There are two issues to be raised.

The US is the biggest import market of Vietnam. In the first 10 months of 2016, the exports of Vietnam to the US were 31.555 billion US dollars, accounting for 21.9 percent of the total export turnover of Vietnam, up by 14.2 percent against the same period of 2015 (two times higher than the growth of the total exports of the country). If dong depreciates against the US dollar, the export to the US will benefit as the prices in US dollars will be cheaper than before, while the import from the US will be limited than before as the prices in dong will be more expensive.

The trade surplus of Vietnam to the US in the first 10 months of 2016 reached 24.691 billion US dollars, fairly high growth compared to the trade surplus recorded in the same period of 2015 (20.998 billion US dollars).

However, the devaluation speed of dong against the US dollar is just half of the increase of US dollar-Index. Accordingly, the dong/US dollar will continue to rise as a result of four factors: the slower devaluation of dong compared to the appreciation of US dollar; the forecast on the further rise of US dollar on the global market; the forecast on the increase of US dollar interest rates; and the slower depreciation of dong against US dollar compared to that of the currencies of other countries in the world, especially the major trading partners of Vietnam.

China is the second largest export market of Vietnam. In October 2016, the exports of Vietnam to this market reached 17.312 billion US dollars, accounting for 12 percent of the total export turnover of the country, up by 24 percent compared to the same period of 2015. China is also the largest import market of Vietnam, with 40.238 billion US dollar turnover recorded in the first 10 months of 2016, accounting for 28.6 percent of the total exports of Vietnam, fell by 1.2 percent compared to the same period of 2016.

Although the trade deficit in the first 10 months of 2016 decreased compared to the equivalent period of 2015 (22.927 billion US dollars compared to 26.855 billion US dollars), China remained the biggest trade deficit market of Vietnam, even larger if including the unofficial transactions. The Chinese yuan/US dollar exchange rate has risen from 6,777 Chinese yuan per US dollar, equivalent to an increase of 0.1022 Chinese yuan per US dollar or 1.51 percent. This means that the Chinese yuan has depreciated against the US dollar but the depreciation speed was lower than the rise of US dollar.

Accordingly, the Chinese yuan/US dollar exchange rate is forecasted to continue rising due to the impact of four factors: the slower growth of Chinese yuan/US dollar exchange rate compared to the growth of US dollar-Index (the exports and trade surplus of China to the US will be smaller in size if the Chinese yuan is not further devaluated (trade surplus of China to the US is currently 300 billion US dollars)); the forecast on the further rise of US dollar on the global market; the forecast on the further increase of US dollar interest rates; and the need to prevent capital from outflowing from China which could reduce the country’s investment and foreign currency reserves. The foreign currency reserves of China have fallen significantly from the peak of nearly 3,900 billion US dollars in 2014 to around 3,120 billion US dollars at the recent time.

The dong/Chinese yuan exchange rate has dropped by 0.6 percent (20 dong per Chinese yuan) from 3.346 dong per Chinese yuan to 3.326 dong per Chinese yuan. It means that dong has appreciated against the Chinese yuan, and the export of Vietnam to China will face difficulty. It also means that the import from China to Vietnam will increase as the prices become cheaper.

In addition to the causes of the direct exchange rates as mentioned in the above, there are some other factors. In particular, if the export of China to the US dollar declines, it will lead to the increase of trade deficit of Vietnam from China in both unofficial and official transactions as Vietnam is in a good location for Chinese goods to be spread.

 


Category: Finance, Vietnam

Print This Post

Comments are closed.