To shed light on this development, Associate Professor Dr. Nguyễn Hữu Huân from Ho Chi Minh City University of Economics spoke with Saigon Investment about the factors behind this unexpected movement.
JOURNALIST: - Dr. Huân, why did the USD strengthen in the global market even after the Fed's second rate cut this year?
Dr. NGUYỄN HỮU HUÂN: - Typically, a rate cut by the Fed reduces the value of the USD relative to other currencies. Lower rates tend to decrease demand for the USD, leading investors to seek markets with higher returns. However, this time, the USD gained value even before the Fed’s rate cut. This is largely due to the policies announced by Donald Trump during his presidential campaign, which focused on his promise to "Make America Great Again."
Trump’s proposed policies include tariff and non-tariff measures to curb imports to the U.S. in order to protect domestic industries. Such policies would create barriers for foreign companies but benefit U.S. businesses by giving them a more competitive environment. This would, in theory, open up more development opportunities for American companies and create more jobs domestically.
In other words, the impact of the Fed's 0.25% rate cut in November pales in comparison to the psychological impact of Trump's electoral victory. Investors seem more influenced by the potential changes that a Trump administration could bring, thus strengthening the USD despite the rate cut.
- Can you predict how long the USD’s current rise in value will continue?
- I believe the current appreciation of the USD is primarily driven by psychological factors. Investors are excited about the U.S. election results, causing the DXY (U.S. Dollar Index) to rise sharply, despite the fact that Trump has not yet been sworn in, and none of his policies have been enacted. This is all based on expectation, and we can expect a short-term reaction. The real test will come once Trump is back in the White House, and the extent to which he implements his campaign promises.
However, it’s important to consider global factors beyond U.S. policy, particularly from the BRICS group. This group—comprising Brazil, Russia, India, China, South Africa, UAE, Egypt, Iran, Ethiopia, and Saudi Arabia—represents about 45% of the world's population and accounts for over 37% of global GDP, more than 2.5 times the size of the EU’s economy. They have been advocating for de-dollarization. If U.S.-China tensions escalate under Trump, and the U.S. ramps up the trade war, China may lead the BRICS in counterbalancing the U.S. through increased efforts to move away from reliance on the USD. If this happens, the USD could face significant depreciation.
- Do you see any concerns regarding the domestic USD/VND exchange rate at the end of this year?
- The domestic exchange rate is climbing, not just because of a stronger USD globally but also due to seasonal factors. In Vietnam, exchange rates typically rise at the end of the third quarter and into the fourth quarter each year. This is when companies ramp up imports to support production and prepare for the year-end shopping season, leading to a spike in demand for USD. Additionally, the State Treasury has been actively purchasing USD to service foreign debt. Recently, about $1 billion was acquired for this purpose, adding pressure on the exchange rate. Foreign investors have also continued a trend of net selling.
However, these factors are not a cause for significant concern in the current context. Inflation remains within an acceptable range, and there is a positive correlation between inflation and economic growth. High economic growth can justify higher inflation, making the current situation manageable.
- There are concerns that Vietnam’s significant trade surplus with the U.S. might become problematic, possibly landing the country on a currency manipulation watchlist. What measures should Vietnam take to address these risks?
- During Trump’s previous term, Vietnam was scrutinized for currency manipulation, but was removed from the list under President Joe Biden. If Trump returns to office, it’s likely that countries with substantial trade surpluses with the U.S. will be reviewed. In 2023, Vietnam’s trade surplus with the U.S. was approximately $100 billion. To avoid potential problems, Vietnam must proactively engage with the U.S., especially under a Trump administration.
I suggest that Vietnam initiate early dialogues to negotiate a reduction in the trade surplus. It’s crucial to act before any formal accusations are made; waiting until a problem arises will be too late. In the longer term, Vietnam needs policies to attract more Foreign Direct Investment (FDI). Currently, 75% of Vietnam’s export revenue comes from the FDI sector. Increasing FDI inflows would boost foreign currency reserves, helping to offset trade imbalances. When FDI enterprises produce competitive export goods, they bring in additional foreign currency. Therefore, creating an attractive environment for FDI in the future should be a priority.
The potential for a shift away from the USD as a global reserve currency cannot be overlooked. With the BRICS group advocating for de-dollarization and growing global skepticism towards U.S. monetary policies, there is a possibility that the global financial landscape could change. If Trump’s policies intensify economic tensions, particularly with China, the push for a diversified reserve system may gain momentum.
Vietnam must remain agile in this environment. A strong FDI strategy, coupled with careful navigation of U.S. trade relations, will be key to maintaining stability. Vietnam’s central bank may also need to prepare for fluctuations in the USD/VND exchange rate due to global volatility, ensuring that domestic economic conditions remain stable even if the international economic climate shifts.
- Thank you very much for your insights.
