The Vietnamese dong is appreciating against the US dollar after the State Bank expanded the forex trading band last week. The central bank expanded the band by +0.25 per cent to +0.75 per cent from December 24, a year after conducting similar increases.
Local banks have been enjoying trading foreign currencies at a wider
The move allows local banks to transact foreign currencies at a wider band beyond the benchmark rate of the inter-bank forex rate.
“In comparison with other neighbouring countries, dong appreciation against the US dollar for foreign investors is a plus as they can now predict market movements more accurately,” said a source from a foreign bank.
“The dong will continue to appreciate in the first quarter of 2008.”
Local banks have transacted with a wider band through using options and the third currency tools once the central bank limited its dollar buy backs from commercial banks in November. The rate was down slightly, standing at VND16,020-16,030 a dollar last week.
Foreign investors in government bonds will benefit in the short term. Bonds bought by foreign investors accounted for two-thirds of total sales during recent bid sessions.
The Hanoi Securities Trading Centre sold bonds worth $62.5 million with three and five-year maturities during the bid on December 24.
Interest rates are 8.15 per cent and 8.65 per cent a year for three year and five year maturity bonds respectively.
“Foreign banks in Vietnam will enjoy bigger profits from increasing bond interest rates and the appreciation of the dong against the dollar,” the official said.
The market, however, saw little reaction as transaction volume remained unchanged.
Historically, the end of the year sees increased transaction volume.
Vietcombank had two-way transaction volume valued at $80 million a day on average, a $10 million increase over November.
The central bank hopes the band expansion will help local commercial banks become more flexible in setting the forex rate based on supply and demand.
Pressure for dong appreciation against dollar was high in 2007 when huge dollar inflows poured into Vietnam through foreign direct and portfolio investment capital while import surplus also topped out at $12.53 billion.
“The market will be more transparent in 2008 because the central bank will manage it with more flexibility as US dollars are brought in gradually,” the official said.