However, the VND/US$ exchange rate in the market has been going in the opposite direction.

VND/US$ exchange rate down to the floor

Contrary to all predictions that the VND would devaluate after the central bank decided to widen the forex trading band, the VND value has increased a little. (Under the current regulations, the central bank declares the inter-bank exchange rate every day, and commercial banks can trade foreign currencies at exchange rates that are 0.25% lower or higher than the declared rates, and the band has just been raised to 0.5%).

In the morning on January 2, 2007, many commercial banks set the purchasing rate at VND16,060/US$1, or 0.25% lower than the inter-bank rate. According to the banks, foreign currencies are abundant at this moment, with more sellers and buyers.

At 10 am on the same day, when the news on the new band of 0.5% was announced, commercial banks decided to lower the purchasing prices by VND20/US$1 compared to the levels quoted early in the morning. The banks, in general, set the purchasing price of VND16,040/US$1, or VND61/US$1 lower than the inter-bank rate.
Experts said that this was the first time the VND/US$ exchange rate had decreased after the central bank adjusted the forex trading band.

Experts said that the VND would further devaluate against the greenback only when commercial banks could sell all the foreign currencies they have. Foreign currencies supplies now are abundant, and the State Bank of Vietnam is still hesitating to bring more foreign currencies in.

Market reaction

No big fluctuations have been seen in the black market. Speculators once intended to keep dollars for selling later to make profit; however, they finally decided to sell the dollars out as the demand for purchasing dollars was very low.

The VND/US$1 exchange rate was VND16,050-16,060/US$1 on January 2, while SJC gold was traded at VND12,380,000/tael. Commercial banks all reported that people were still making deposits in VND; they seem to not intend to buy dollars to make deposits in dollars.

The fact that the dollar purchasing power is low makes securities companies and foreign investors unhappy. Securities companies said that their clients, the foreign investors, were planning to sell several hundred millions dollars to make investment in securities, but they could not do that right now.

Why widen the forex trading band?

Truong Van Phuoc, Head of the Forex Management Department under the State Bank of Vietnam, said that the decision on widening the forex trading band was one of a series of solutions aiming to create a more flexible VND. Other solutions have been initiated since 2004. For example, banks and clients can negotiate the VND/US$ exchange rates for cash transactions.

Mr Phuoc said that the widening of the forex trading band aims to reduce the pressure that may makes the local currency more valuable in the context of high foreign currency flow into Vietnam. With the new band, commercial banks will be able to set the trading rates more flexibly: the rates can be VND160/US$1 higher or lower than the declared inter-bank rate instead of VND80 as previously.