The US Dollar Index (DXY) – a measure of the greenback’s strength against major currencies – hit 109.08 points on January 3, 2025, its highest level since late October 2022. The surge in the US dollar on the first trading day of 2025 was driven by expectations that the US economic growth would outperform other countries and interest rates would remain high.
Fed cautious and hopeful about new administration
Fed Chairman Jerome Powell stressed caution in monetary policy decisions, including interest rate cuts, at a December 2024 press conference as inflation remains a closely watched issue. In addition, economic policies from President Donald Trump’s second term, including fiscal expansion and tariffs, are expected to boost economic growth but also increase inflationary pressures.
Mohamad Al-Saraf, strategist at Danske Bank, said: "The greenback continues to be supported by expectations of President Trump's bullish policies and the lack of confidence in the Fed's interest rate cut roadmap in 2025." Sharing the same view, Charu Chanana from Saxo said: "The strength of the dollar could be maintained until early 2025 thanks to the uniqueness of the US economy and high bond yields."
Pressure on exchange rates and operating interest rates in Vietnam
In Vietnam, the USD/VND exchange rate at commercial banks is currently at the ceiling level and exceeds the intervention selling price. In this context, the State Bank of Vietnam (SBV) may have to adjust the operating interest rate to avoid pressure on foreign exchange reserves after selling a large amount of USD in 2024.
According to Vietcap Securities (VCSC), the Fed's tighter monetary policy management could increase the risk of USD/VND exchange rate fluctuations, making it difficult for the SBV to maintain its economic support policy. VCSC forecasts that the SBV may increase the discount and refinancing rates by 0.5 percentage points and the deposit interest rate ceiling for terms of less than 6 months by 0.25 percentage points in 2025.
HSC Securities also made a similar forecast, with the discount and refinancing rates likely to rise to 4.75% and 5%, respectively, by the end of 2025. HSC predicts the USD/VND exchange rate will continue to rise, reaching 26,000 by the end of 2025, up from 24,950 at the end of 2024.
Impact of US fiscal policy and outlook for VND
HSC assesses that if President Trump’s expansionary fiscal and tariff policies are implemented, the US economy will grow strongly but also face high inflation risks. The upward trend of the USD will continue to weigh on the VND, leading to the fourth consecutive year of depreciation of this currency.
HSC compared the current period to previous VND devaluation cycles, such as 2008-2011 and 2013-2016, and warned of challenges in maintaining exchange rate stability and foreign exchange reserves.
These developments pose big problems for Vietnam's monetary policy in 2025.
