Unusual exchange rate movements in recent times reflect the shifting expectations on the monetary policy by the U.S. Federal Reserve (Fed) and declining foreign exchange reserves, following a period of significant foreign capital outflows in 2024 Exchange rate rises as Fed signals slower rate cuts The exchange rate between the U.S. dollar and the Vietnam dong has surged, reaching a peak last seen in June 2024, immediately after the U.S. Federal Reserve announced an interest rate cut of 25 basis points in December 2024. Simultaneously, the Fed signaled a slower-than-expected pace of rate reductions. Consequently, the U.S. Dollar Index (DXY) climbed above 108 points, marking its highest level since 2023, putting significant pressure on the Vietnam dong. In response, the State Bank of Vietnam (SBV) intervened by selling about US$1.8 billion from foreign exchange reserves over a few days. Additionally, the SBV deployed liquidity-regulating tools, such as SBV bills and open market operations (OMO), at an annual interest rate of 4% to maintain the swap rate difference between the dong and the dollar near zero. While selling foreign currency helps stabilize the exchange rate, these developments underscore the domestic financial market’s sensitivity to the Fed’s policies, especially given its cautious […]