The Fed’s Rate Cut: Implications for Vietnam’s Economy

The US Federal Reserve (Fed) has cut interest rates for the second time this year, a reduction of 25 basis points. Economist Dr. Nguyen Tri Hieu attributed this move to the core inflation rate falling to 2.6% and expected to reach 2% this year, alleviating the Fed’s concerns about inflation.

Despite the Fed’s rate cut, the USD Index remains high, reaching 104.95 on November 8th, indicating the strength of the US dollar. This strength can be attributed to Donald Trump’s reelection as US President, which has boosted the dollar’s value against other currencies.

“Trump’s victory has excited the financial markets, and as a result, the value of the dollar has increased relative to other currencies. Typically, a Fed rate cut would lead to a decrease in the dollar’s value, but Trump’s reelection has counteracted that effect, keeping the dollar strong,” said Dr. Hieu.

Consequently, the Fed’s rate cut has not significantly depreciated the VND/USD exchange rate, failing to stimulate excitement in Vietnam’s stock market. As evident in the past two days, the Vn-Index has declined. With the VND/USD exchange rate remaining high, imports remain expensive, continuing to impact inflation in Vietnam,” analyzed Mr. Hieu.

Meanwhile, Professor Dinh Trong Thinh offered a different perspective, suggesting that the Fed’s rate cut will primarily have positive impacts on the Vietnamese economy.

With Trump’s reelection, investors anticipated a stronger dollar, economic growth, and improved stock performance. However, the rate cut has led to a depreciation of the dollar, easing the pressure on the VND/USD exchange rate and making investments in Vietnam more attractive.

The low-interest rates in the US may also encourage investors to seek more profitable opportunities in emerging markets like Vietnam, which can still offer appealing interest rates.

Additionally, the Fed’s move could provide the State Bank of Vietnam (SBV) with an opportunity to consider reducing interest rates in the floating market, thereby supporting the country’s economic development.

“However, it’s important to note that there could be some negative impacts, such as a potential decrease in Vietnam’s exports due to a slowdown in the US economy, reducing the demand for Vietnamese goods,” explained Mr. Thinh.

Nevertheless, experts believe that the Fed’s 0.25% rate cut, bringing the range to 4.5%-4.75%, will have a negligible impact on Vietnam’s economy, and the SBV has the necessary tools to manage exchange rates effectively, ensuring stability in the foreign exchange market.