The greenback has devaluated against the VND in the last two months, and it is expected that the greenback value will be stable or just see very slight increases in 2007.

The greenback value was once very high, at VND16,000/US$1 in 1991, when Vietnam began opening its economy. The VND/US$ exchange rate then decreased sharply in 1992 and then only saw slight decreases or increases. Except from the years 1997 and 1998, when the Asian financial crisis occurred and the local currency devaluated considerably, the VND/US$ exchange rate has been stable, while witnessing just slight increases.

In January 2007, the greenback unexpectedly reduced by 0.12% in value, and further reduced by 0.21% in February, leading to the decrease of 0.33% in the first two months of the year. The dollar value just rose by 6.4% in the time between December 2001 and February 2007, while the consumer price index (CPI) increased by 38.5% during that time, and gold price increased by 144%. If comparing further, the CPI increased 161.7% in the time between December 1991 and February 2007, while the gold price by 87.3%, and the dollar price increased by 10%. The figures show that the dollar price increases are always lower than the CPI and gold price increases.

Especially, the dollar price reduced in the last two months. There are three reasons behind the decrease.

First, the high economic growth rate makes the local currency stronger. It is quite normal that the currency revaluates when the economy performs well.

Second, a big sum of foreign currency inflowing into Vietnam from many sources:

1. Foreign direct investment (FDI). The FDI capital registered in 2006 made a record of $10.2bil

2. Official development assistance (ODA). The ODA capital committed by the donors for 2006 was very high, at $4.45bil

3. Overseas remittance (the money sent by Viet Kieu to their relatives and families in Vietnam). Some $4.7bil were remitted in 2006.

4. Spending by foreign tourists to Vietnam ($2.8bil)

5. High exports ($39.6bil)

6. Foreign portfolio investment ($4bil, or 28.6% of the market capitalization volume of the stock market)

With the profuse supplies of dollars, the VND/US$ exchange rate will find it hard to increase.

Third, the greenback is now devaluating against other currencies in the world. One dollar now can be changed for Euro0.76, or Yuan7.72 and baht35.6.

In fact, if considering the purchasing power parity (PPP), one dollar in Vietnam has the purchasing power equal to $4.3 in the US. That explains why Vietnam’s GDP per capita is $725.3 if calculating based on the exchange rate, but would be $3,118 if considering the PPP. That also explains why the US imports more from developing countries than exports to these countries, while it makes both direct and indirect investment in these countries.

The above mentioned reasons can give explanations why the local currency has not devaluated against the dollar since the beginning of the year, despite the fact that the central bank decided to widen the foreign currency trading band from 0.25% to 0.5% (the actual exchange rate defined by commercial banks can be 0.5% higher or lower than the inter-bank exchange rate announced by the State Bank of Vietnam).

More than 10 years ago, when the Asian financial crisis occurred, some experts then asked the Government to devaluate the local currency to VND17,000 or VND19,000/US$1. However, the VND/US$ exchange rate has not exceeded the VND16,000/US$1 level in the last 10 years.

As such, the local currency would not devaluate or will just see very slight decreases in the first half of the year.