Dong weakens as dollar demand rises
Source: 17-MAY-2008 Intellasia | 14/May/2008 Thoi Bao Kinh Te Vietnam
May 17, 2008 - 7:00:00 AM After fluctuations in the first week of May, the dong/US dollar exchange rate continues climbing to new high levels, which has presented adverse signs. On May 14, the selling price of US dollars at commercial banks simultaneously increased by another seven dong against the previous day. Since the start of May, the forex rate has surged.

Namely, in the first week after holidays of April 30 and May 1, the selling price of US dollars at commercial banks unexpectedly surged by another 20 dong, forming the second strong growth since the start of this year. And by now, the dong/US dollar has risen by up to 40 dong against the above holidays.

Currently, the selling price of US dollars at commercial banks jumped to 16,165 dong a US dollar compared to 16,450 dong in the free market. Compared to the lowest level of 15,300 since the start of this year, the forex rate in the free market has increased by up to 150 dong.

Since the start of May, the above movements, which have happened within short period of time, have demonstrated strong fluctuations in demand and supply for foreign currency in the market.

According to a report of the central bank last week, demand and supply for foreign currency in the market signalled an imbalance whereby demand for foreign currency has had an upward tendency.

The direct reason still comes from demand for foreign currency of importers. With the current movement of the forex rate, various disadvantages are being clearly seen when costs for goods and equipment import are higher. Such demand has been even stronger when trade deficit since the start of this year amounted up to US$11 billion. This figure is also resulting in adverse pressure on forex reserve of the central bank although the central bank continues sending a message that it will help commercial banks by selling foreign currency to them.

A remarkable move is that although the central bank has offered assistance to banks, raising deposits at banks have signalled a slowdown. In the first four months, deposits in foreign currency at the banking system rose by some 1.73%, higher than the growth of dong deposits. However, the growth of deposits in both dong and foreign currency in the first four months, 5.39% remains lower than the same period last year, 15.55%.

Another restriction is that while the ceiling interest rate for dong agreed among banks increase, the ceiling interest rate for US dollar deposits remain unchanged.

Meanwhile, the market has recognised some proposals on raising import duty and limiting gold import in order to rein trade deficit, which also indirectly reduces demand for foreign currency. The prime minister has also officially instructed the central bank to consider limit of gold import in order to realise the target of trade deficit reduction.

Additionally, the imbalance between demand and supply for foreign currency, according to the central bank, comes from higher demand for foreign currency in petroleum import when energy price in the international market sharply increases.

Since the beginning of May, the petroleum price in the world market continues escalating, which causes difficulties for petroleum businesses. Presently, the petroleum price is nearly approaching US$126 a barrel and the dong/US dollar rate is rising, which is pushing up import costs of these businesses. This disadvantage also pressurises to adjust domestic retail prices.

Facing up that pressure, the central bank has issued Official Letter 4228/NHNN-TD asking commercial banks that are allowed to conduct forex operations to realise some contents in order to ensure petroleum importers to have enough capital and foreign currency to import petroleum in 2008.

Currently, commercial banks continue having demand for buying foreign currency from the central bank. Accordingly, the forex regulator said that it will continue selling foreign currency to assist commercial banks, satisfy demand for foreign currency of the economy, stabilise demand and supply for foreign currency in the market.