Dong/dollar exchange rate fluctuates in short term, but stabilizes in long term

The dollar sale prices quoted by commercial banks are marching toward the 21,000 dong per dollar threshold. However, experts believe that no heavy price fluctuations would be seen in 2012.

Commercial banks have all raised the buy and sell prices in recent days. After the price fluctuation on March 20, 2012, the dong/dollar exchange rate had been hovering around 20,870 dong per dollar. The exchange rate stabilization was obtained in the context of the continued dong interest rate decreases. To date, the State Bank of Vietnam has three times cut down key interest rates.

However, the succession of peaceful days of the greenback ended on June 1, when commercial banks unexpectedly quoted the dollar prices higher by 20-30 dong per dollar than previously.

On the morning of June 4, the highest dollar price quoted by Vietcombank was 20,950 dong per dollar, or 80 dong higher than the price at the end of May.

Later on the afternoon of the same day, some other big banks including Eximbank also raised the sale price from 20,920 dong to 20,950 dong per dollar. Especially, the dollar price at Techcombank was very high at 20,960 dong per dollar. The margin between the purchase and sale prices is 60 dong per dollar on average.

As such, this is for the first time the dollar price increased after a long period of stabilization, putting an end to the succession of 128 days of the unchanged dollar price.

Analysts have attributed the dollar price hike to the expectation on further dong interest rates. There have been signs showing that the dong interest rates would be cut more sharply than previously expected. Especially, some foreign institutions have even predicted that the State Bank of Vietnam may slash the key interest rates by 2-3 percent further in the third quarter of the year.

If this happens, the gap between the dong and dollar interest rates would be narrowed significantly. Earlier this year, the gap between the dong and dollar deposit interest rate was reportedly at 12 percent per annum, while the lending dong loan interest rates were triple that of dollar loans. However, the gap has been narrowed to 7-9 percent per annum for both lending and deposit interest rates.

However, the recent dollar price increases have not worried businesses. Earlier this year, the State Bank of Vietnam stated that it would not allow the dong to depreciate too sharply this year. The statement was made after considering relating factors, including the foreign direct investment, the market conditions, the expected overseas remittance and the trade gap.

In a newly released report, JP Morgan Singaporean branch said it believes the dong value would be stable this year.

Prior to 2008, the State Bank devaluated the dong by one percent a year on average. However, after 2008, the dong/dollar exchange rate was adjusted more regularly due to the economic condition changes. In 2011, the exchange rate was also adjusted in a flexible way after the government of Vietnam released the Resolution No. 11 on stabilizing the macro economy.

Since the resolution was released, the dong has been more stable, becoming one of the few regional currencies which saw the appreciation against the US dollar. The positive thing occurred in the context of the cooled inflation rate.

Vietnam’s payment balance has been improved thanks to the decreasing trade deficit. Besides, Vietnam can also benefit from the stable overseas remittance volume and the capital under the mode of foreign direct investment FDI.

JP Morgan also thinks that Vietnam’s foreign currency reserves would continue rising thanks to the surplus in the payment balance.

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