Dollar forecast to rise against dong

VCBS anticipated the rise despite a pledge by the State Bank of Vietnam (SBV) to ensure that devaluation of dong against dollar remains less than 2 per cent this year. With the dong devalued by 1 per cent twice already, in January and May, SBV has no room left for more foreign exchange adjustments this year.

The next adjustment will mainly depend on when the US Federal Reserve decides to raise its benchmark interest rate this year as the US economy continues to gain strength, VCBS said. The steady rise in the value of the dollar against other major currencies would be a key factor putting pressure on Vietnam's exchange rate for the dong and on the country's forex market in the remaining months of the year, it forecast.

The dong's exchange rate will continue to be affected negatively by the rise in the value of the dollar as the Fed is expected to take the first step to raise the federal bond rate at some point later this year, according to VCBS. Moreover, many major countries in the world still have to take measures to loosen and stimulate their economies, due to instability, a slowdown or a recession, VCBS said.

Besides the low interest rate for dong deposits and the speculation over the dollar, Vietnam's exchange rate for the dong in the remaining months of the year will face pressure from the significant trade deficit, which reached US$3.7 billion in the first half of the year, VCBS said.

However, VCBS also cited some factors that would help reduce pressure on the forex market in the remaining months of the year.

Inflation is forecast to remain at a low rate this year while remittances from abroad could rise 10 per cent in 2015 to reach $13-14 billion, it said. The disbursement of FDI capital this year is also expected to be positive, with $6.3 billion reported in H1, it added.

In addition, medium- and long-term foreign capital flows into Vietnam are expected to rise significantly thanks to the signing of trade agreements with major trading partners and the new regulation giving more room to foreign investors to trade in the stock market, according to VCBS.

After the two devaluations, the reference rate of the dong against the dollar currently stands at VND21,673 per dollar. The dong is allowed to trade as much as 1 per cent either side of this rate.

Commercial banks currently trade the dong at VND21,830-21,840 per dollar, close to the ceiling rate of VND21,890.