The Saigon Economic Review discussed with Mr. Vu Quang Viet, a former senior economist of the United Nations, about the US dollar’s appreciation despite high inflation in this country.
KTSG: Why is the US dollar strengthening while inflation in the US is currently as high as 8.5%? With such an inflation rate, even if interest rates are raised but still very low, the US dollar must depreciate strongly, right?
– Mr. Vu Quang Viet: The convertible value of a currency on the international market depends on a few factors, mainly the supply and demand of that currency in the market. Essentially, the currency conversion value between the two countries should also reflect the relative inflation rates between the two countries.
But inflation reflects the total price of all goods and services, and the value of money reflects the price of goods that can be imported and exported and the need for financial investment. In less developed countries, only the prices of imported and exported goods are reflected. Because of this, there is a difference between the purchasing power parity (PPP) rate and the nominal exchange rate.
A country’s policy regarding capital control also affects conversion value. For example, during the Asian financial crisis, Malaysia decided not to allow foreign investors to sell shares, exchange money and transfer capital abroad for one year. The demand for foreign currency is therefore reduced and Malaysia retains the value of its domestic currency, not experiencing the inability to repay foreign debts like Thailand or Indonesia.
However, capital control should only be for a limited time to stop the actions of financial speculators or reduce panic, because if left for too long, it will create a parallel black market and adversely affect import-export and balance of payments, ability to repay foreign debts, etc. and the optimal development of the economy.
Currently, inflation in the US is above 8%, in Europe it is close to that, about 6%. In Germany alone, April inflation was 7.4% and prices are expected to increase to 11.4%. Although inflation in the US was slightly lower, the US dollar appreciated against the euro as the market expected it to increase due to the war in Ukraine and the long-term impact of energy prices. According to Bloomberg, in the next 10 years, inflation in Europe will be higher than in the US because the Ukraine war pushes up energy prices in Europe.
In Japan, April inflation was 2.4%, higher than the set target of 2%. Japan is happy because this is the result of many years of Japan wanting to raise prices, because prices fell for many years leading to an economic recession. The only difference is that the US inflation is caused by an increase in household spending (due to the policy of funding and distributing income to people during the Covid-19 period), while Japan has increased prices because of rising prices. Therefore, in general, the US economy is still better and the price of the US dollar against the Japanese yen is higher because of that.
KTSG: Another paradox is that similar to the US dollar, the Russian ruble, which should have depreciated sharply, is now about 20% higher than it was before the war?
– The case of the Russian ruble is simple for two reasons. 1) State controls capital flow: recently, Russia forced all businesses that earn foreign currency to immediately sell them to the central bank, and then increase deposit interest rates to 20% to attract money to banks. 2) Russia collects more foreign currency than before due to oil and gas exports; crude oil price from $65/barrel, now to $100 or higher because of supply cuts due to embargo.
Russia sold less oil but received more foreign currency, so Russia’s balance of payments had a strong surplus in the first quarter of 2022, up to $95.8 billion. The supply of foreign currency increased, but the import of Russian goods decreased due to the embargo, so the demand for foreign currency decreased.
At first the ruble depreciated very quickly (1 US dollar changed to 140 rubles compared to 70 rubles before) but now the ruble has recovered, priced higher than before (1 US dollar is only 55 rubles). However, raising interest rates will have a strong impact on economic growth, with most predicting that Russia’s GDP will shrink by at least 10% this year.
According to Saigon Economic Review
