The State Bank
of Vietnam
has succeeded in restraining the dong/dollar exchange rate to low levels after
applying a series of comprehensive measures. However, it has been warned that
if restraining the exchange rate at low levels for too long, this may lead to
bad consequences, including the liquidity weakening and higher trade gap.

Only on
April 29, the State Bank of Vietnam
increased the dollar purchase price by 214 dong per dollar, in comparison with
the price of April 28. Prior to that, the central bank kept the purchase prices
at low levels for a long time.

The
statistics show big gaps between the market prices quoted by Vietcombank and the
exchange rates announced by the State Bank’s Exchange, which have existed since
early April.

On April 1,
Vietcombank sold dollars at 20,915 dong per dollar, while the State Bank
announced the purchase price at 20,501 dong per dollar, or 414 dong per dollar
lower than the Vietcombank’s rate.

On the next
16 consecutive days, from April 1 to April 22, Vietcombank quoted the sale
prices between 20,915 dong and 20,940 dong per dollar. The prices quoted by the
State Bank were 20,496 at the lowest and 20,526 dong per dollar at the highest.

On the days
from April 25 to April 29, when Vietcombank, because of the low custom, quoted
relatively low prices at 20,770 dong, 20,760 dong, 20,590 dong, 20,595 dong per
dollar, respectively, the exchange rates announced by the central banks were
still low at 20,501 – 20,491 – 20,486, and then increased to 20,700 dong per
dollar on April 29.

On May 25,
the sale price quoted by Vietcombank moved up to 20,720 dong per dollar, but
the central bank’s price was not updated.

Analysts
have commented that the State Bank of Vietnam has succeeded in
restraining the dong/dollar exchange rate by applying a series of comprehensive
measures.

Specifically,
the State Bank tightened the monetary policies and withdrew Vietnam dong from circulation, which has made it
more costly to keep dollars than Vietnam dong. The too low deposit
interest rate for dollars at 3 percent at maximum has made it not attractive to
keep dollars. People have been rushing to convert dollars into dong to deposit
dong at banks to enjoy the interest rates of 14 percent per annum.

However,
analysts have also pointed out that one should not think that the more sharply
the dong/dollar exchange rate decreases, the better the foreign currency market
will be.

An obvious
thing which can be seen on the foreign currency market in recent days; is that
though the sellers continuously reduce the sale prices, the buyer still keeps
indifferent. In the circumstances, where the State Bank acts as the final and
only buyer, the exchange rate has been decreasing for a long time.

“The
current dollar price has become too “negative”. They do not truly reflect the
market situation,” a banker said.

Some
analysts also say they cannot understand why the State Bank has been trying to
force the prices to go down so sharply for such a long time. Meanwhile, some
others guess that in the context of the high inflation (the CPI in April 2011,
increased by 3.32 percent over the previous month), the central bank does not
want to put Vietnam
dong into circulation to purchase dollars at this moment.

The State
Bank has been warned that if the exchange rate continues going down, it will do
more harm than good.

A finance
expert believes that the exchange rate downward tendency proves to be
unsustainable, because there has been no change with the dollar supply. In
2010, Vietnam
could earn 3 billion dollars from gold exports, while it will not have the
source of earning this year.

Secondly,
when the gap between the dong and dollar interest rates is too big, dollar
holders will try to sell dollars out, which will “activate” the massive import.
Once this happens, this will make the trade gap more serious.

In the
first four months of the year, the trade deficit has reached 4.9 billion
dollars.

Source: TBKTVN