Currency Exchange Rate Dynamics

📈 USDVND rate is tightening, what's driving this trend and what's next? 🌐 USDVND rate is at 25,600 VND/USD, VND devalued -3.4% YTD. In the whole 2023, VND devalued -4.2% 💡 The primary reason for recent VND devaluation is interest rates. VND interest rates are at historic lows, even lower than the rates observed during the COVID-19 period. The gap between USD and VND interbank interest rates have remained positive since the start of 2023. Such low interest rates diminish the attractiveness of holding VND, thereby increasing the demand for USD. Recent factors including disparities in gold prices and heightened imports, have added to the pressure on VND. 🗺 When it comes to managing exchange rate volatility, there are typically two options: selling USD reserves or increasing VND interest rates. The experiences in Q3 2022 have underscored the limitations of selling USD reserves, as it often proves unsustainable and can deplete reserves rapidly. Therefore, the focus shifts to the second option: increasing interest rates.⚓ 🏛 To this end, SBV recently reintroduced Treasury bills, aiming to absorb excess liquidity from the banking system. The objective is clear: reduce liquidity to drive up VND interest rates and enhance the attractiveness of the currency, thereby stabilizing the exchange rate. This tactic mirrors actions taken in September 2023, when the State Bank issued 360 trillion VND worth of Treasury bills over seven consecutive weeks, effectively managing exchange rate fluctuations. 🤵 Industry insiders have predicted the need for interest rate interventions to stabilize the exchange rate. Indeed, Treasury bond yields and secondary market bond yields have both risen in recent weeks. 📊 However, the current scenario differs from that of September 2023. Economic growth was slow in 2023, the demand for imported goods decreased, leading to an increase in the trade surplus and a greater supply of USD. Looking ahead to 2024, an uptick in economic and consumption activities may reverse this trend, leading to increased import demand and a reduced trade surplus. Consequently, relying solely on interbank market instruments may prove insufficient. 💰 In such circumstances, it becomes imperative to increase savings interest rates, as was done in the third quarter of 2022. Despite the prevailing trend of lowering interest rates to stimulate growth, prioritizing exchange rate stability leaves little room for alternatives. 1️⃣ First and foremost, stabilizing the exchange rate must take precedence. 2️⃣ Secondly, it's crucial to note that increasing savings interest rates does not necessarily translate to an increase in lending interest rates. Supporting growth hinges on maintaining competitive lending rates. 📈 Given the evolving landscape, it wouldn't be surprising to witness an increase in VND savings interest rates in the coming months, potentially leading to a decrease in the net interest margin (NIM) of banks. 🏢

📉 What’s going on in FX markets? A break with rate logic. For years, the EUR/USD exchange rate has largely followed the interest rate differential between the EU and the US – especially in short-term government bonds. But that connection seems to be breaking down: The 1-year yield spread is at -2.3% – clearly favoring the US dollar. Investors earn significantly more on 1-year US Treasuries than on their eurozone counterparts. Normally, this would be a strong case for USD appreciation. And yet: The euro has strengthened against the dollar since the so-called “Liberation Day” in April 2025, the day Donald Trump announced sweeping new tariffs. At that very point, EUR/USD and the rate spread diverge – a decoupling not seen in years. 💡 What does this mean? Markets seem to be prioritizing political over monetary signals. Classic FX logic based on yield advantage is being overshadowed – by geopolitical tensions, protectionism, and growing doubts about the USD’s safe-haven status. 📊 Conclusion: The exchange rate is breaking out of its historical pattern – a red flag for analysts, exporters, and investors alike. Traditional models no longer apply automatically. 👉 What do you think: temporary distortion – or the start of a new FX paradigm? Chart by TradingView #Forex #Currency #AssetManagement

Kwacha's Remarkable Rally Amid Strategic Economic Interventions and Its Implications In a surprising turn of events, the Kwacha has started the week with a significant rally against the US Dollar, marking a positive shift following Zambia's strategic economic interventions. This surge could be partially attributed to panic selling by dollar holders, eager to secure profits from earlier purchases or to minimise losses in anticipation of further Kwacha appreciation. This situation resembles a self-fulfilling prophecy, where the expectation of a stronger Kwacha boosts its demand and, consequently, its market value. This reflects the intricate relationship between market sentiment, policy decisions, and the fundamentals of currency valuation. However, the rapid appreciation of the Kwacha brings with it a set of mixed implications for Zambia's economy. On the one hand, a stronger Kwacha reduces the cost of imports, which can help in controlling inflation and making essential goods more affordable for Zambians. It also lessens the local currency burden of foreign debt, offering some relief to the government and businesses with external obligations. On the flip side, a rapidly appreciating Kwacha can pose challenges, especially for sectors reliant on exports. Exporters might find their products becoming more expensive and less competitive on the global market, potentially affecting Zambia's trade balance and foreign exchange earnings. This rapid currency movement can also make financial planning difficult for businesses and investors, who rely on predictable exchange rates for their economic decisions. These developments underscore the importance of policy measures aimed at ensuring a gradual and stable movement in the Kwacha's value, rather than erratic fluctuations. Stability in the exchange rate is crucial for enabling businesses to plan and make informed financial decisions, thereby fostering a conducive environment for economic growth. As Zambia continues to navigate its economic landscape, the recent Kwacha rally highlights the delicate balance required in economic management. It suggests that with careful and strategic planning, it's possible to achieve sustained currency stability and build economic resilience, but this must be coupled with policies that encourage gradual and predictable currency movements to support long-term economic planning and growth.

𝐃𝐞𝐜𝐨𝐝𝐢𝐧𝐠 𝐓𝐫𝐮𝐦𝐩𝐨𝐧𝐨𝐦𝐢𝐜𝐬 At its core, the Trump administration argues that America's role as global reserve currency provider has led to dollar overvaluation, hurting US manufacturing while benefiting financial sectors. I will break this hypothesis to simplified macroeconomic model. - 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐀𝐜𝐜𝐨𝐮𝐧𝐭 𝐁𝐚𝐥𝐚𝐧𝐜𝐞 (𝐂𝐀): The difference between a country's total exports and total imports (goods, services, income). CA > 0: Surplus (Exports > Imports)    CA < 0: Deficit (Imports > Exports) - This is the US situation.   - 𝐍𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐒𝐚𝐯𝐢𝐧𝐠𝐬 (𝐒): The total savings within a country by households, businesses, and the government. S = Private Savings (S_p) + Public Savings (S_g) Public Savings (S_g) = Government Tax Revenue (T_gov) - Government Spending (G)    If T_gov < G, there's a Fiscal Deficit (FD), so S_g = -FD. Therefore, S = S_p - FD - 𝐃𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 (𝐈): Spending on capital goods (machinery, buildings, etc.) within the country. - 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐀𝐜𝐜𝐨𝐮𝐧𝐭 𝐁𝐚𝐥𝐚𝐧𝐜𝐞 (𝐊𝐀): Net flow of capital into the country (foreigners buying US assets minus US residents buying foreign assets). By definition (ignoring errors), KA = -CA. A current account deficit (CA < 0) implies a capital account surplus (KA > 0), meaning a net inflow of foreign capital is financing the excess of imports over exports. - 𝐄𝐱𝐜𝐡𝐚𝐧𝐠𝐞 𝐑𝐚𝐭𝐞 (𝐄): The value of the domestic currency (USD in this case). A higher E means the dollar is "stronger" or "overvalued". - 𝐅𝐨𝐫𝐞𝐢𝐠𝐧 𝐑𝐞𝐬𝐞𝐫𝐯𝐞𝐬 (𝐑): Holdings of assets (like US Treasury bonds) by foreign central banks. The most crucial relationship for understanding this hypothesis is the Savings-Investment Identity: CA = S - I This equation states that a country's current account balance is equal to the difference between its national savings and its domestic investment. The US has a persistent Current Account Deficit (CA < 0). From the identity: CA < 0 implies S < I. The US invests more than it saves domestically. How is this possible? It's financed by capital inflows from abroad (KA > 0). Foreigners are willing to lend to the US or buy US assets (stocks, bonds, real estate). 𝐓𝐫𝐮𝐦𝐩 𝐀𝐝𝐦𝐢𝐧𝐢𝐬𝐭𝐫𝐚𝐭𝐢𝐨𝐧 𝐚𝐫𝐠𝐮𝐦𝐞𝐧𝐭 - Foreign countries want to hold US dollars/assets as Reserves (R ↑). - This increases demand for the US dollar. - Increased demand leads to an appreciation/overvaluation of the dollar (E ↑). - A stronger dollar (E ↑) makes US exports more expensive and imports cheaper, worsening the CA deficit (CA ↓) Link to Manufacturing: If the goal is a larger manufacturing sector, Trumponomics implies needing a CA surplus (CA > 0) or at least a smaller deficit. To reduce the CA deficit US must either: - Increase National Savings (S ↑) - Decrease Domestic Investment (I ↓) What Trump is doing is tax cuts without corresponding spending cuts and large tariff hike will not decrease borrowing leading to high deficit.

𝐖𝐡𝐲 𝐚 𝐡𝐢𝐠𝐡 𝐝𝐨𝐥𝐥𝐚𝐫 𝐢𝐬 𝐧𝐨𝐭 𝐛𝐞𝐧𝐞𝐟𝐢𝐜𝐢𝐚𝐥 𝐟𝐨𝐫 𝐭𝐡𝐞 𝐔𝐒 𝐞𝐜𝐨𝐧𝐨𝐦𝐲❓ The US dollar has rallied 4% this year relative to a basket of 6 other currencies (DXY) and 9% since Jan 22, so Americans have been enjoying cheaper holidays abroad..🥳 However, a higher dollar can be problematic for the domestic US economy. Why⁉️ We can review this question through the lens of the 𝗲𝘅𝗰𝗵𝗮𝗻𝗴𝗲 𝗿𝗮𝘁𝗲 𝗲𝗳𝗳𝗲𝗰𝘁. ——————————————————————— The US is an open economy that engages in lots of international trade..🤝Over the last 2 decades exports accounted for about 12% of GDP. An increase in the domestic price level causes appreciation of the real exchange rate which is the quoted nominal exchange rate adjusted for price level. Therefore, a higher price level affects the real exchange by making domestic goods more expensive in other countries which in turn reduces exports..🔻It also makes non-domestic goods less expensive domestically which increases imports..🔺Overall, the result is lower demand for domestic goods and services..📉 🏦This effect is amplified through the 𝗶𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗿𝗮𝘁𝗲 𝗲𝗳𝗳𝗲𝗰𝘁 - when interest rates (and expectations for rates) increase in one country relative to another non-domestic investors increase demand for the domestic currency in the forex market as they want to achieve higher returns on savings..💵This increased demand causes the domestic currency to appreciate and increases the real exchange rate..📈 The two effects are not mutually exclusive but complementary. As a result, we have started seeing US exports gradually declining over the last 2 years, albeit slower than expected. However, should the dollar remain elevate, we can start seeing more significant impact on GDP figures..⚠️ —————————————————————— What’s your expectation for the US dollar? Comment below.👇 #us #dollar #analysis #macro #economy #interestrates #investing #exports #imports #markets

🚀 Another enormous climb in the Taiwanese dollar today, up almost 8% over the last two sessions against the USD, by far the biggest two-day increase on record. ▶️ So what's going on? The Taiwanese dollar (TWD) has been surging due to a combination of economic, trade, and market factors in 2025: ✔️ Easing Trade Tensions: Speculation about reduced U.S.-China trade tensions, particularly following indications that China is open to trade talks with the U.S., has boosted optimism for Taiwan’s export-driven economy. ✔️ Strong Economic Growth: Taiwan’s GDP grew at an annualized rate of 9.67% in Q1 2025, with annual growth of 5.37%, surpassing forecasts. A ✔️ Tech Sector Strength: Strong U.S. tech earnings, particularly from companies like Microsoft and Meta, have signaled sustained demand for AI and semiconductors, where Taiwan plays a critical role through companies like TSMC. This has driven foreign capital inflows and supported TWD appreciation. ✔️ Exporter Behavior and Capital Flows: Exporters have been converting U.S. dollar holdings to TWD, while typical USD buyers have stepped back, creating a feedback loop that amplifies TWD gains. Additionally, Taiwan’s life insurers and pension funds may be hedging or repatriating USD assets, further boosting the TWD. ✔️ Speculation on U.S. Pressure: Market speculation suggests the U.S. may be pressuring Taiwan to allow TWD appreciation to reduce its trade surplus with the U.S. ahead of tariff negotiations. While Taiwan’s central bank has denied direct U.S. requests, this perception has fueled market dynamics, with some traders fearing a “Plaza Accord 2.0” scenario. ✔️ Market Dynamics and Central Bank Policy: The TWD’s rally has been magnified by high trading volumes, with non-deliverable forwards reaching global trading peaks. The central bank has intervened to smooth volatility but has not aggressively countered the TWD’s rise, allowing market forces to play a larger role. ✔️ Regional Currency Trends: The TWD’s surge aligns with broader strength in Asian currencies, such as the South Korean won and Indonesian rupiah, amid trade optimism. The TWD has outperformed, gaining nearly 6% against the USD in 2025, making it a top performer among emerging Asian currencies. 🔴 Note that weakness is obvious from the 15% of GDP current account surplus or any examination of purchasing power parity. In real effective terms, the Taiwan dollar is down 25% from its pre-Asian financial crisis level (i.e. the mid 90s) Source: Bloomberg, Grok

The current U.S. administration wants to erode the USD status in the international monetary system as part of an effort to weaken it permanently against other currencies, hoping that a more depreciated USD might reduce the trade deficit and attract manufacturers to the U.S. There is a correlation between USD share in global trade, the USD FX, and the U.S. trade deficit: - The U.S. trade deficit reflects that the U.S. imports more than it exports, driven by low domestic savings relative to investment needs, causing reliance on foreign borrowing. - A persistent trade deficit tends to coincide with a current account deficit and a growing negative net international investment position (NIIP). - The USD’s global trade share and FX rate are influenced by the trade deficit, but the correlation is indirect and mediated by macroeconomic factors like fiscal policy, savings, and capital flows. The way the trade deficit is affecting the USD FX and the USD share in global trade is as follows: - A large trade deficit often corresponds with a stronger USD because foreign investors buy USD assets to finance the deficit, supporting demand for the currency. - However, an overvalued USD makes imports cheaper and exports more expensive, which can widen the trade deficit further. - Fiscal deficits and FX rate policies have a causal impact: reducing fiscal deficits and allowing the USD to depreciate can help shrink the trade deficit by making exports cheaper and imports more expensive. - Despite the trade deficit, the USD remains dominant in global trade and reserves due to its reserve currency status and global financial role. The U.S. trade deficit is linked to the USD FX rate and its share in global trade through complex macroeconomic channels. While a large trade deficit tends to support demand for USD (strengthening it), an overvalued USD can worsen the deficit. Fiscal and FX rate policies play a crucial role in balancing these dynamics, influencing both the trade deficit and the USD’s global role. Now, there is correlation between USD’s share in global trade and its FX rate, but it is complex, in the sense that when the USD strengthens, its share in global reserves tends to rise. However, over the long term, its share of global reserves/ trade has declined, suggesting structural shifts/ diversification by central banks + global trade partners play a significant role. Overall, if the U.S. administration really does aim to erode the dollar’s status, the international monetary system could enter a form of anarchy it hasn’t experienced since Nixon disconnected the value of the USD from gold back in 1971. If the international monetary system cannot rely on the dollar’s full convertibility, or its availability in a crisis, it is entering unknown territory. An abrupt deterioration of the dollar’s international status would sharply raise US borrowing costs, while offering China a much easier path to internationalising its own currency.

👇👇👇 NEW WORKING PAPER: "Asymmetric Exchange Rate Pass-Through" is available at https://lnkd.in/eZc5-HPP Using monthly data from 84 countries, this paper estimates the exchange rate pass-through into consumer prices. The investigation is achieved by the local projections method, where currency depreciations versus appreciations, high versus low inflation rates, and high versus low exchange rate volatilities are considered. The empirical results suggest that the exchange rate pass-through is higher during currency depreciations, higher inflation rates, and for countries with higher exchange rate volatilities. When alternative country groups are considered, the exchange rate pass-through estimates increase progressively from advanced to emerging to developing countries, where the highest asymmetry is observed for currency depreciations versus appreciations. These exchange rate pass-through estimates are further used in a general equilibrium model to measure the corresponding welfare costs, where it is shown that higher pass-through estimates are associated with higher (lower) welfare costs in the case of a domestic (foreign) productivity shock. Important policy suggestions follow.