Exchange rate mechanism of Vietnam- the necessity to change in the new environment

Abstract

Since 2012, State Bank of Vietnam was set the target fluctuation band of the exchange rate at the beginning of the
year and use a broad array of monetary policy tools to achiveve this goal. This policy has proved its effectiveness in
stabilizing the foreign exchange market, limiting institutional speculation and reducing “imported inflation” situations,
thereby contributing to macroeconomic stability during 2011- 2015 period. However, the current exchange rate also has
weakness as it creates one-way expectation when the Vietnam dong is always on depreciation. The international and
domestic environment less favorable since mid-2015 has deepened this problem, resulting in high VND depreciation
expection. In the coming time, as Fed continues with its increasing interest rate policy and the further depreciation
of many currencies of emerging markets, especially the Chinese yuan, the pressure will be accelerating. Therefore,
exchange rate management policy of Vietnam should be adjusted to become an effective tool in absorbing external
shocks while ensure economic stability and development.