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What are the causes for US dollar appreciation?
The exchange rate of the US dollar against the Vietnamese Dong (VND) recorded an all time high on May 27, reaching VND17,600/US$ on the black market, up 6.9 percent against the rate last December. It sparked a buying spree among the public to either hoard or transfer their dollars abroad.
Former Governor of the State Bank of Vietnam Cao Sy Kiem gave an insight into the “gold rush” mentality during an interview granted to VOVNews on the fringe of the current National Assembly session in Hanoi. Excerpts from the interview:
What are the causes for such a surge?
Mr Kiem: Simply demand is exceeding supply on the domestic market. The purchasing power of the banks is slowing down, while the demand for US dollar, mostly for production and imports, is increasing. In addition, many people are searching for US dollars to either hoard or transfer abroad.
Paradoxically while the US dollar is depreciating on the world market, it is appreciating in Vietnam. Could you further elaborate on that?
The surge demonstrated the levels of supply and demand the US currency has in Vietnam. It reflected the real demand of the domestic market, as well as the Government’s economic management policies.
The US dollar has recently experienced several ups and downs. How does it affect the national economy?
The US dollar depreciated strongly several months ago due to high inflows of foreign capital into the country, including direct and indirect investment and remittances from Vietnamese nationals abroad. At the same time, transactions almost came to a standstill. After a while, there was a shortfall in the supply of US dollars while the demand was increasing. In addition, Vietnam’s trade deficit remained high. These factors have eventually changed the market laws of supply and demand.
How do the fluctuations impact on economic management policies?
It will have a rather big impact. The strong US dollar will benefit our exporters, and vice versa, a weak US dollar will drive the trade deficit up. As the overall manager and controller, the State is regarded as walking a tightrope. If off balance, it will fall. In other words, the rapid depreciation of the VND will benefit exporters, but it is very risky because our trade deficit remains high. If we attract more investment capital, inflation will rise again. All these factors are closely related, requiring the State to have flexible policies. For Vietnam, it is very risky to reduce exports or increase imports at present. It is worth mentioning that to reduce the trade deficit, we have no choice but to increase exports.
Also on May 27, people also rushed to jewellery shops to buy gold as the gold price had shot up sharply. How long do you think it will last?
When property and stock transactions come to a standstill, gold is the only product from which investors can make a profit. The fact is that up to 80 percent of investors are dealers. However, such investments run a high risk due to unexpected fluctuations in the world gold market. Once gold prices go up and capital sources are frozen, hoarding gold is a feasible option, even for central banks and big investors. At some time in the future, they will sell the gold to make a big profit. In brief, the domestic gold market relies on global hoarders, and for a small country like Vietnam, people will face losses unless they make right decisions.
Vietnam is one of the big gold hoarders. Is that good or bad?
Too bad. It is not easy to hoard gold. Gold prices fluctuate all the time and the majority of hoarders will lose out sooner or later because they are inexperienced in the field compared to the rest of the world.
Do you think that there will be a downturn in gold prices in the near future?
There won’t be a huge decline, but gold traders will face a lot of risks. It is worth remembering that only a few countries hold a larger market share of food and oil – the two most important products in the world. It is not surprising to see that only a few professional gold hoarders can corner the global market.
VOV
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