13 February 2025
The US dollar has appreciated sharply since September 2024 on a broad basis and especially against emerging market currencies including the Vietnamese Dong. From our perch, dollar strength was caused by a reflexive (self-reinforcing) rise in US long term Treasury yields, the path of future short-term interest rates, growth, and inflation expectations. Of course, the rise in the US dollar and US yields since September was in anticipation of the Trump/Republican victory in November 2024 and the policy agenda (including tariffs). What is unusual (if not unique) about the rise in future short rates and Treasury yields in this episode is that occurred when the Federal Reserve “lowered” the funds rate.
The appreciation of the US dollar also originates from the central role that it plays as the global reserve currency. More debt is issued in US dollars than any other currency (around 40% of all short-term debt and 50% of all long-term debt). The US dollar also remains dominant in central bank reserves, capital flows and trade. It is also important to remember that currencies are always a relative price. Interest rates, growth, inflation, and external positions are always relative considerations in foreign exchange.
While debt to GDP is high in the United States there is also a lot of external debt denominated in dollars. The larger fiscal impulse in the US over the past few years has likely supported stronger relative growth and returns on US assets. The good news looking forward is that US dollar strength and a higher path for US interest rates (a higher neutral rate for the Fed) is already the dominant consensus belief among investors.
On Vietnam specifically, external debt and government debt to GDP are very low by international standards. Moreover, Vietnam has been increasing its share of global exports while maintaining a strong current account position. In our experience, the increase in the global export market share is strong empirical evidence that Vietnam and the VND is competitive. It is also important to note that the performance of the VND has been consistent with the broad performance of Asian currencies since 2019 (both the VND and broad Asia has depreciated by 10% over that period chart 1).
Chart 1
Historically it has paid to allocate to countries with low debt/leverage and high returns on capital. While Vietnam has a trade surplus with the United States, a large proportion of the surplus has been due to the shift in production to Vietnam for the “right reasons” (competitiveness). Our sense is that Vietnam is also in a strong position to work with the Trump Administration on a mutually beneficial outcome.
In conclusion, investors should not fear USD strength or a reduction in USD liquidity. Rather, dollar strength is an opportunity for international investors to allocate to countries like Vietnam with low debt and high potential returns on capital.
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