If the strong rally of the U.S. dollar continues in global markets, it will inevitably pose multiple challenges for the foreign exchange market at home, especially since trade and investment activities in the coming time will probably be affected by the conflict between Russia and Ukraine.
The greenback emerges as safe haven globally
Following a rise of VND41 in February, the central exchange rate between the U.S. dollar and the dong further increased by VND19 in the first week of March, standing at VND23,159 per U.S. dollar on March 7. Meanwhile, the price for transactions at banks has picked up an additional VND40-50 since the beginning of this month, after it jumped VND170-180 in February.
The upward trend of the U.S. dollar in the domestic market is inevitable considering how this currency has been skyrocketing globally for a month now. The U.S. Dollar Index once surpassed 99 points on March 7, a surge of approximately 2.5% in the first seven days of March and of more than 4% compared to early this February. The 99-point mark is also the highest level since May 2020.
The military conflict in Ukraine is seen as the main driver of the greenback’s rally these days, as it stimulates the demand for safe haven currencies such as the yen (Japan), the franc (Switzerland), and the U.S. dollar. In addition, with the expectation that the U.S. Federal Reserve (Fed) will raise the key interest rate for the U.S. dollar in the near future right at its meeting in March, for example, investors would have good reason for swing trading with this currency.
Despite the opinion that the war in Ukraine may prevent the Fed from lifting its key interest rate this month, now that inflation is persistently escalating, the possibility of the Fed raising interest rates is fairly high. Fed Chairman Jerome Powell himself, during his testimony before the U.S. House Committee on Financial Services on March 2, confirmed that the agency would adjust up interest rates “cautiously” at the meeting this March, but would also be willing to adjust interest rates more aggressively if inflation does not “cool down” as quickly as expected.
Will domestic forex market face challenges?
If the strong rally of the U.S. dollar continues in the international market, it will inevitably pose multiple challenges for the foreign exchange market at home, especially since trade and investment activities in the coming time will probably be affected by the conflict between Russia and Ukraine.
Statistics show that two-way trade between Vietnam and Russia amounted to US$7.14 billion in 2021, up 25.9% over the preceding year, which, however, accounted for only 1% of Vietnam’s total import-export turnover. With Ukraine, the figure was even lower, at only US$720.5 million last year. Similarly, in the first two months of this year, the import-export turnover with these two markets made up a mere 1%. Also, Vietnam has a trade surplus of over US$109 million with the Russian market and of more than US$49 million with Ukraine.
It is because of such modest figures that many believe Vietnam’s trade will not be affected too severely by the ongoing war. However, it should be noted that Russia is a leading exporter of several key commodities, from energy such as oil and gas to food, foodstuffs, and raw materials as inputs for many other manufacturing industries, such as aluminum, nickel, palladium and neon gas used in the production of semiconductor chips.
As soon as Russia was hit with sanctions or deliberately stopped exporting these items in retaliation for the Western sanctions, the global supply chain will probably get disrupted again, dealing a hard blow to other manufacturing industries, and severely affecting countries with a high level of trade openness such as Vietnam. When other manufacturing sectors struggle with a shortage of raw materials or rising input costs, their competitiveness will be hampered, adversely affecting the export turnover to other markets as well.
Not only that, the increased fuel prices plus the need for a detour, avoiding Russian and Ukraine airspace, will further push up the costs of transportation and logistics. This factor will also have a negative impact on commercial activities. As per statistics, Vietnam recorded a trade deficit of US$937 million in the first two months of this year.
The current military conflict is no good news to investment activities globally, especially in Vietnam. As revealed by the latest data from the Ministry of Planning and Investment, by the end of February 2022, Russia ranked 24th among all nations and territories with investments in Vietnam, with 151 projects worth a total of US$953 million, mainly in the energy sector. Meanwhile, Ukraine ranked 69th with 26 projects totaling US$30.03 million.
Though investment inflows from Russia constitute just a minor part, in the current unpredictable situation, investment flows from other countries into Vietnam may also be affected, taking into account the risk of supply chain disruptions, tightening monetary policy around the world, and risk aversion. It is noteworthy that the total foreign investment capital into Vietnam, including newly registered/adjusted capital and the value of capital contribution and share purchases by foreign investors, witnessed a year-on-year decline of 8.5% in the first two months of 2022, reaching only US$5 billion.
Meanwhile, Western sanctions such as Russia’s exclusion from the SWIFT or the recent Russian government’s ban on foreign currency transfers abroad to protect the value of the ruble could also affect traditional remittances from the Vietnamese in Russia in the near future. It is also important to note that a substantial depreciation of the ruble is likely to weaken remittances from Russia by its very nature.
In addition, in the context of galloping global prices of many commodities and energy, causing inflation everywhere, plus interest rates maintained at a low level in response to the Covid-19 pandemic for more than two years, economies worldwide will have to deal with the pressure of local currency depreciation, especially developing economies such as Vietnam.
Last but not least, with the domestic gold price skyrocketing in recent days, widening its gap with the current world price to more than tens of millions of dong per tael, it is very likely that people will feel a strong urge to stock up on the greenback to smuggle in gold and profit from such a price difference.