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Gold up, dollar down in unusual VN reaction
Source: VNS - 3/17/2017 10:04:17 AM
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The Federal Reserve’s decision on Wednesday to increase interest rates by 0.25 percentage points - to what is now between 0.75 to 1 per cent - has pushed down the Việt Namese đồng-US dollar exchange rate and elevated domestic gold prices in accordance with global market movements.

The exchange rate listed by the Joint Stock Commercial Bank for Foreign Trade of Việt Nam dropped by 50 đồng on Thursday, clocking in at VNĐ22,740 per US$1 buying and VNĐ22,810 per $1 selling.

US dollar buying and selling prices offered by the Việt Nam Export Import Bank also decreased to VNĐ22,720 and VNĐ22,820, respectively.

Early Thursday morning on the Asian stock market, the dollar index dropped to 100.51 points, the lowest in three weeks.

In contrast, domestic gold price followed the global surge, bringing the average gold bar price up VNĐ150,000 per tael (1.2 oz), the biggest increase in ten days.

The DOJI Gold and Gems Group reported an increase of VNĐ140,000 per tael buying and VNĐ150,000 selling to VNĐ36.63 million ($1,646) and VNĐ36.78 million ($1,652) per tael respectively.

Similarly, the Phú Nhuận Jewelery JSC announced a rise in buying and selling SJC gold prices to VNĐ36.65 million ($1,647) and VNĐ 36.87 million ($,1656) per tael.

World gold prices are experiencing the biggest hike since September 2016, as the end of Thursday trading session on the New York Stock Exchange recorded a 1.8 per cent increase of $21.1 per oz to $1,220.7 per oz.

Gold prices in Asian markets have increased a further $4.5 per oz to $1,225.2 per oz.

Unexpected reaction

Market reaction after the Fed’s rate hike was not what people expected. Normally when the Fed raises rates, dollar prices are expected to jump. However, instead of falling gold prices and a rising dollar, the market moved in the opposite direction.

Cấn Văn Lực, senior advisor to the Chairman of the Bank for Investment and Development of Việt Nam told the online newspaper cafef.vn that the Fed’s rate hike was relatively unusual as it usually adjusted the rates every June or December.

"This shows that the US economy in particular, and the world in general, has recovered at an impressive level. The Fed therefore can tighten monetary policy," Lực said.

In addition, the move could prepare for President-elect Donald Trump’s policies of fiscal and tax cuts to attract businesses back to the US.

"This also creates a very hot growth momentum in the US market and the Fed needs to take early policy moves to control inflation," he said.

For the world economy and Việt Nam in particular, the Fed’s decision has four impacts, he said.

The first is on interest rates. When the Fed increases interest rates, interest on the US dollar in the world, including Việt Nam, will rise.

Second, the exchange rate will also be under pressure. Specifically, the Fed action together with Trump’s policies will push up the dollar sharply this year. The rising dollar will put devaluation pressure on many other currencies, including the Vietnamese đồng.

Third, capital inflows would also be under shifting pressures. The capital flows from developing countries, including Việt Nam, would likely be withdrawn to return to the US and EU, where higher interest is offered.

The fourth is the impact on public debt and foreign debt of many countries. In fact, many foreign debts are still denominated by the US dollar.

He said the opposite direction of the market reaction was an interesting phenomenon. He explained that investors had predicted the Fed’s move, leading to growth of stock indexes last month.

"However, when the Fed increases the rate, investors are left wondering whether the four risks will materialise. When risk is forecast, gold price rises immediately. It is hard to explain the situation logically. However, it is real,” he added.

Banking-finance expert Nguyễn Trí Hiếu said the increasing gold prices and drop of US dollar prices were normal as the local market has gotten used to shocks. In particular, the central bank’s operating policies have been a powerful tool to cope with changes.

Hiếu said the market had some fluctuations but did not "create waves" because it had prepared well for the anticipated rate hike.

“However, the Fed rate hike this time is expected to put pressure on the exchange rate. Currently, the foreign exchange market is stable but in the long run will be affected,” he added.

Interest rates on deposits in US dollar in foreign countries will likely be raised. This could result in foreign currency transfers abroad. Therefore, the State Bank of Việt Nam should reconsider the US dollar deposit policy, he said.

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