Vietnam Adopts More Market-Based Exchange Rate as Dong Pressured

05-Jan-2016 Intellasia | Bloomberg | 6:00 AM Print This Post

The State Bank of Vietnam reduced the dong’s reference rate for the first time since August, after saying over the weekend that it is moving to a more market-based methodology in setting a daily reference rate versus the dollar.

It lowered the fixing by 0.03 percent to 21,896 against the greenback on Monday, after the currency sank to the limit of its allowed trading range in late December. The monetary authority had kept the rate unchanged since August 19, when it cut the fixing by 1 percent and increased the currency’s trading range to 3 percent on either side.

That followed another band widening on August 12. The central bank also cut the reference rate by 1 percent in both January and May of 2015. The currency ended 2015 at 22,495 per dollar, 2.7 percent weaker than the central bank’s December 31 reference rate of 21,890. It was trading little changed on Monday at 22,498.

“The dong’s daily reference rate will make it easier for market stakeholders,” Do Ngoc Quynh, Hanoi-based head of treasury at Bank for Investment & Development of Vietnam, said by phone. “It also helps policy makers avoid accumulated pressure on the dong and allows them to be more proactive in coping with changes in global markets.”

The State Bank said over the weekend that the new mechanism will take into account movements in major foreign currencies that are relevant to Vietnam’s trade and investment activities. The rate will also reflect domestic and international money-market developments, the central bank said, adding that it is willing to sell dollars to stabilise the money market and ensure the dong can fluctuate within its trading band. It didn’t release a statement on Monday.

The move comes as tightening monetary policy in the US boosts demand for the greenback and a depreciating yuan drags currencies lower across Asia. The dong’s 4.8 percent loss last year compares with slides of 19 percent for Malaysia’s ringgit and 10 percent for Indonesia’s rupiah, the region’s two worst-performing currencies. Supporting the exchange rate has come at a cost to the Vietnam’s foreign-currency reserves, which tumbled by $6.7 billion to $31 billion in the third quarter, according to Trinh Nguyen, a Hong-Kong based senior economist for emerging Asia at Natixis SA.


Category: Finance, Vietnam

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