VND/US$ exchange rate fluctuations: grounds for caution (29/05)
06/08/2010 - 48 Lượt xem
Do you think that the sharp increases of the dollar’s value in the last few days are worrying? Why has the VND/US$ exchange rate increased so sharply?
The fact that the dollar value increased dramatically from VND16,600/US$1 to over VND17,000 just in one day in the context of the weak dollar around the globe proves to be an abnormal thing.
The explanation by the State Bank of Vietnam that the demand for dollars is increasing to feed the need for imports proves to be reasonable. Vietnam is witnessing its highest-ever trade deficit.
However, the sharp devaluation of the VND within so short a time should not be considered a result of the trade deficit only.
The worrying thing is that as the dollar price is on the steady rise, dollarisiation may occur. If it does, people will prefer using the dollar in savings and transactions instead of the VND. If so, the demand for dollars will increase further. As a result, the dollar will become scarcer.
What should the State Bank of Vietnam do to stabilise the foreign currency market in the context of the loosened gaps between the prices on the official and black markets?
The basic solution for the problem is that the State Bank of Vietnam has to pump dollars from the foreign currency reserve fund into circulation to stabilise the market.
The market’s performance will depend on the moves of the State Bank. If it quietly provides dollars in sufficient volume, the situation will be less tense, and dollar speculation will stop.
However, if the central bank lets the dollar price escalate further and does not make any move, people may think that the central bank is following another plan in forex management. For example, they may think that the central bank is deliberately letting the VND devaluate in order to encourage exports and limit imports. In this case, the dollar revaluation could be seen as a kind of import tax aiming to protect local products and encourage exports.
However, I think that it would be very dangerous if the State Bank of Vietnam showed its determination to keep a rein on the exchange rate by pumping dollars into circulation in big quantities. The worse-case scenario would be if it used administrative orders to regulate the foreign currency market.
Once the intention of the State Bank is exposed, it is likely there will be a new ‘attack’ on the market. In this case, the international and domestic speculation circle will closely watch for the moves of the State Bank of Vietnam, estimate the scale of the national foreign currency reserve, in order to attack at suitable times. The attacks, if successful, would bring huge profit. I think that now more than ever, the State Bank of Vietnam should be very cautious with its moves and plans.
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Nguyen Quang Huy, Director of the Forex Management Department under the State Bank of Vietnam: Do you think that the sharp price increases of the dollar are worrying? The sharp price increases of the dollar have badly affected the psychology of people and businesses, and partially affected capital mobilisation. However, as the scale of the black market is very small, it cannot cause disorder in the financial market, for production and business. But do you think that the price increases truly reflect the supply and demand of dollars in the current conditions? I can say that the dollar supply and demand imbalance is not as big as people think, and is still within the control of the State Bank. The trade deficit will decrease gradually from now to the end of the year thanks to the policies on controlling imports, cutting public investments and delaying construction projects. How will the State Bank’s forex management policy perform? The exchange rate will be stabilised with the currency value fluctuation of 2% at maximum as the Prime Minister instructed. |
Source: TBKTVN
