Heat taken out of dollar trades

The dollar has also suffered a rough ride internationally

Early last week, the public’s demand for the greenback went up dramatically, pushing the exchange rate on the black to record levels over the last few years. On May 27, the exchange rate hit VND17,750/USD, much higher than late March’s VND15,300/USD.

A Vietcombank official said the banking system’s greenback shortage coupled with current economic fundamentals created the speculation. In response to the issue, the State Bank warned the market that skyrocketing demand on the black market was more likely for hoarding purposes than real demand.

“Speculation could bring losses to investors as once the exchange rate turns to a downtrend, people would en masse sell out the greenback,” said the Vietcombank official.

“Greenback demand could derive from negative economic fundamentals like the ever rising consumer price index. However, the State Bank’s foreign currency reserves are still going up this year and enough to cover the economy’s needs,” said Nguyen Quang Huy, the State Bank’s Foreign Exchange Department head.
“The size of the black market is still negligible to the official market. Thus, the greenback fever on this market is not affecting the banking system,” he added.

After the State Bank’s message was spread, the black market exchange rate decreased. To last Friday, the rate was down to around VND17,000/USD. “The State Bank will continue selling dollars to local banks,” Huy said.
A Bank for Investment and Development of Vietnam (BIDV) source said on May 27, the State Bank sold a large volume of greenbacks to commercial banks for supplying local importers, especially petroleum traders. BIDV alone bought up to $100 million on May 27.

A State Bank source said commercial banks should submit documents showing dollar supplies to importers before selling greenbacks. The BIDV source said that, in the short-term, the Vietnamese dong would not likely appreciate with the economy’s rising demand given the widening trade deficit.

Over the first five months of 2008, the trade deficit has hit $14.4 billion, nearly equal to the whole of 2007.
“At the moment, greenback demand from foreign banks’ branches is rising sharply. This also creates a considerable demand for greenback,” said the BIDV source.

In fact, foreign banks’ branches normally have to buy dollars from local banks via the interbank market. Until May 26, they have raised their buying rate up to VND17,350/USD. “However, foreign players are finding hard to source greenbacks as local banks are also facing a shortage,” said the BIDV source.