The State Bank of Vietnam, which bought US$7 billion (VND113 trillion) in the first seven months of this year, said in a report earlier this week that the dollar had fallen against the dong in the past two months.

It attributed that to a number of factors including inflows from foreign stock market investors and a sharp increase in foreign direct investment.

"Compared to the peak of the dollar reached on August 18, the dollar has lost about 1 percent against the dong in Vietcombank's transactions," the bank said.

Vietcombank is the main state-owned bank for foreign trade payments.

Bankers said the central bank had slowed the pace of its purchases of the US dollar in the past month, even though foreign investment continued to pour in.

It was not clear why the central bank had bought less foreign exchange.

"The central bank is to focus on continuing purchases of foreign currencies to add to the national foreign exchange reserves," Deputy Prime Minister Nguyen Sinh Hung said in the directive.

"The bank should intervene reasonably in the market to manage the dong/dollar exchange rate at a suitable level to avoid any excessive appreciation or depreciation of the dong," he added.

However, the central bank said supply and demand for currency were balanced, adding "there has not been any indication of a surplus of dollars at commercial banks as some have reported recently."

Vietnam had a record trade deficit of $7.6 billion (VND122 trillion) in the January-September period.

But actual foreign direct investment in the first nine months of this year jumped nearly 19 percent from a year earlier to $3.3 billion (VND53 trillion), and analysts estimate foreign investors have ploughed $4.8 billion into the stock market so far this year.

On top of that, remittances from Vietnamese living overseas surged 53 percent in the first half to $2.9 billion (VND47 trillion).

The dollar was quoted at 16,084/16,085 per dong yesterday.

The dong is allowed to fluctuate by 0.5 percent each day.

The government has also ordered the Ministry of Finance and the central bank to issue more medium-term government bonds to take dong out of circulation.

A record central bank dollar-buying spree in the first seven months pushed up the volume of dong in circulation, raising concerns about inflation.

Dong interest rates fall on liquidity

Meanwhile, short-term Vietnamese dong lending rates on the interbank market eased during the past week as liquidity remained strong, but rates should rise in the coming weeks, bankers have said.

Four state-run banks, Vietnam's key lenders, offered overnight dong loans at about 6 percent down from 6.3 percent last week, and about 7.2 percent earlier last month.

Rates on six-month loans were stable at 8.5 percent last week.

"The dong liquidity at banks is only temporary as banks raised more of the currency in the third quarter to prepare for a traditional surge in loan demand in the fourth quarter as companies need funds to meet contract payments," a banker in Hanoi said.

Overnight rates on the dong normally rise to about 8 percent in December, when both corporate and consumer finance demand peaks ahead of Tet, another banker said.

On the dollar front, bankers said most banks reported abundant dollar supplies, mainly from direct and indirect foreign investment sources.

"The dollar supply is particularly strong at foreign banks since they handle many offshore clients," a banker in Ho Chi Minh City said.

Foreign investment funds had wired large amounts of dollars from offshore stock investors to banks in the past month, contributing to the dollar surplus in the system, he said.

Stock traders said many foreign funds had opened accounts at securities companies to cash in on the booming markets in the Southeast Asian country.

In addition, a surge in remittances from Vietnamese living overseas also contributed to the strong dollar liquidity.

The Asian Development Bank estimated last month remittances in the first half jumped 53.4 percent from a year earlier to $2.9 billion.

Source: Reuters.