The local currency strengthened against the US dollar over last week. The dollar/dong exchange rate opened at 15,749 last Monday November 1 and closed at 15,740 last Saturday, the lowest level for nearly four months. It was also a depreciation of 0.60% in comparison with the level of 15,647 by end-2003.
This depreciation is also much lower than the State Bank of Vietnam (SBV)’s target to keep the local currency’s depreciation at 1% against the dollar for the whole year of 2004.
Forex buyers, at the moment, are quite comfortable with the current movement in the market. Most of them prefer to buy dollars spot rather than forward to avoid expensive US dollar/dong forward rates. Wide US dollar/dong interest rate differential still makes US dollar/dong forward rates much more expensive than spot rates. At the moment, importers need to pay approximate 75 dongs above spot rate for one-month US dollar/dong forward buying.
It seems that commercial banks in HCM City still have sufficient US dollars to meet their customers’ demand, which often increases at the end of the year. According to SBV’s Branch in HCM City, banks in the city attracted dollar deposits equivalent to 46.6 trillion dong (US$3 billion) by end-October, compared to their outstanding dollar loans of slightly more than 44 trillion dong. Banks also bought US$1.05 billion from their customers last month while they sold out US$1.10 billion. In the past years, the dollar has often picked up against the local currency toward the end of the year, but things are different this year. There has no been any sign of an upward trend to demand for the greenback yet.
Domestic interest rates held at the same level during the week, on signs of an easing demand for dong. On the interbank market, overnight fund was quoted at 5.6 to 5.7% per annum. Liquidity continued to be high, as evidenced by banks were in surplus of fund ranging from overnight to 3 months. In addition, the State Bank of Vietnam pumped one trillion dong into the market last week via its open market operation.
Meantime, the State bank of Vietnam has kept the base rate at 7.5%, unchanged for the past year. A report by the planning and investment ministry showed that Vietnam’s outstanding loans at the end of October were nearly 21% higher than the end of 2003 while the outstanding loans in foreign currencies were 29.4% higher. The report also indicated that foreign currency deposits grew 17.6% while dong deposits increased 13.24%.
This article was written by HSBC Vietnam