The Federal Reserve (Fed) has decided to keep its benchmark interest rate at 5.25%-5.5% during its June 2024 meeting, marking the seventh consecutive time it has maintained the highest interest rate level in over two decades. Although this decision was anticipated, it still exerts considerable pressure on emerging markets, including Vietnam.

In the foreign exchange market, the USD/VND exchange rate continues to face upward pressure. Since the beginning of the year, the US Dollar Index (DXY) has risen by over 4%, pushing the central exchange rate announced by the State Bank of Vietnam (SBV) to 24,300 VND/USD, nearly hitting the allowed band. The SBV has had to intervene by selling foreign currency from its foreign exchange reserves and issuing bills to absorb VND liquidity. By the end of June, Vietnam's foreign exchange reserves are estimated to have decreased by about $10 billion compared to the end of 2023, falling to nearly $90 billion.

The exchange rate pressure also negatively impacts foreign direct investment (FDI) flows. In Q2/2024, newly registered FDI capital into Vietnam reached $5.2 billion, down 12% year-on-year. High capital costs globally make investors more cautious in allocating funds to emerging markets. However, Vietnam still benefits from a stable political environment, competitive labor costs, and free trade agreements. Disbursed FDI capital in the first half of the year still reached $9.2 billion, a slight increase of 2% year-on-year, indicating medium-term investor confidence.

The SBV faces a challenging balancing act: controlling inflation while supporting economic growth. Its policy rate is currently at 4.5% per annum, much lower than the Fed's rate, creating a negative interest rate gap that puts pressure on the exchange rate. Experts suggest that the SBV may have to raise interest rates by an additional 0.25-0.5% in the second half of the year if the Fed shows no signs of cutting rates. This would affect credit growth and business production activities.

In summary, the Fed's maintenance of high interest rates poses significant challenges for Vietnam's monetary policy management. Investors should closely monitor exchange rate developments and SBV actions to formulate appropriate strategies. In the long run, a solid macroeconomic foundation will help Vietnam weather these external headwinds.