Fixed exchange rate to limit the impact of external large shocks

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According to the VEPR, the exchange rate fluctuation mostly took place in the fourth quarter of 2016, after two major events in the US (the US presidential election and the decision on interest rate increase of FED). Photo: H.Diu.

From 1 January, 2016, the State Bank officially applied the fixed exchange rate regime flexibly and determined based on supply and demand for foreign currenciesin the market and the value of the domestic currency compared to 8 reference currencies.

Looking back the year of implementation of the fixed exchange rate regime, the VEPR said that, basically, the new regime helped stabilizing the exchange rate and limiting the impact of the external large shocks. Accordingly, the reference exhcnage rate increased by only 1.18% in theend of year compared to the begginning of 2016 at the threshold of 22,154 VND / USD. At the same time, the oscillation amplitude was also less than ± 1,5% during the year. Meanwhile, the selling exchange rate listed at Vietcombank increased by only 0.55%, with an amplitude of ± 2.54%

The exchange rate fluctuations mostly took place in the fourth quarter of 2016, after two major events in the US (the US presidential election and the decision on interest rate increase of FED), making the US dollar strengthened against most of other major currencies, which led to turmoil in the Vietnam exchange rate market. Psychological factor of people also contributed to the exchange rate increase.

Additionally, the baseless rumors but easy to spread about the possibility of currency change (based on the recent practices of India in the demonetization of rupee 1000 notes) made people worried and tend to buy USD and gold for reserves, causing inconvienient turmoils for unofficial markets.

Particularly in the fourth quarter, the reference rate and the selling rate at Vietcombank increased by 0.98% and 2.10 % respectively compared to the end of third quarter. However, if tracking the interbank market, we could see that the supply and demand for foreign curencieswas relatively stable. This could be explained due to the external exhange rates increased but the transaction volume was not really large enough to affect to the market in the banking system.

"Furthermore, the intervention of the State Bank is absolutely possible because of the abundant reserves, suppoting the market stability. Therefore, it can be said that from the end of 2016 to the Lunar New Year 2017, the State bank can stabilize the market technically, " the VEPR reported.

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At the same time, the VEPR recommened that the Government should closely coordinatee in terms of propaganda to help the public understand the actual situation and not cause psychological turmoils on a large scale.