Exchange Rate on Fire

The market is on fire when the State Bank of Vietnam (SBV) increased average rate of interbank by one percent (VND21,036). At that time, each dollar sold increased from VND21,300 to VND21,400 and until July 8, it jumped to the peak of VND21,890.

After more than a year and a half, the foreign exchange rate is on fire again. The average foreign exchange rate of the interbank had been adjusted up to VND21,036. As a rule, the commercial banks are not allowed to trade dollars lower than VND20,825 per USD and higher than VND21,246 VND per USD. The dollar price listed and sold at the commercial banks reached the ceiling price in the days later, and the dollar price of the black market has escalated to VND21,900.

Recurrence of two foreign exchange rates

Banks have confirmed that the supply and demand for trading dollars are normal and the banks are supplying enough foreign currencies to meet demands of businesses and individuals. But the fact shows that buying dollars from the bank is no longer as easy as before. That is understandable because if only buying dollars in the bank is to benefit from the price difference, the transaction cannot be easy. Many of the businesses complained that after June 28 when the SBV had decided to increase the rate by one percent, they would find it difficult to buy dollars. But some businesses cannot buy dollars to settle the import orders so they are forced to buy dollars at ceiling price, almost black-market prices.

This signals a return of two price rates: one listed as a symbol price and one adjusted based on the black-market price and legitimized by related fees, such as transfer fees and fines.

Unless the exporting companies with revenues mainly from USD dollars shall be given priority to buy dollars; however, buying dollars directly from the SBV is never easy and now, is much more difficult because of shortage of dollars and unremarkable difference in value between the SBV and the black markets so many companies accept to buy dollars from the black markets. Therefore, the black market, despite the tightened supervision of the authorities, has been operating well for many years.

Normally, the foreign exchange rate often becomes stressful at the end of the year; however, although the economy is still glooming in the middle year, the rate was hot again.

Fortunately, the situation seems calmer in recent days. The dollars in the black markets have been cooled down. The selling price has been reduced from VND21,630 to VND21,700 per USD. Compared with the peak of VND21,890 on July 8, the foreign exchange rate has fallen down to a total of VND150-VND200. The rate is unlikely to climax because of quite abundant supplies of dollars of the black market and the SBV. The fluctuations of the foreign exchange rate depends so much on power of market demand; if the market demand is weak, the value of dollar will immediately be adjusted down to stimulate buying.

Which, gold or psychology, has impacted the foreign exchange rate?

The speculators and researchers, policy makers follow closely the timeline of June 30 when the banks are forced to close the gold status. Before this time, the SBV has pumped a very large amount of gold into the market and the bank has absorbed all of that after that. After June 30, the gold auction continues to happen and tonnes of gold have been sold out surprisingly. By July 9, the SBV has held 41 auctions to sell a total of nearly 43 tonnes of gold. Customers, mainly commercial banks, have purchased gold to settle the gold status. But at this moment, the gold status has not been settled while the demands for gold has continued to grow although the SBV does not sell gold at the price lower than the market price and the gold price of the domestic market is still by far the world price of VND4-6 million per tael.

The SBV just only imports gold and moulded gold into SJC for auction to earn profits. It is true that the SBV has gained national budget for roundly VND4,000 billion from the average difference of VND4 million per tael, which already has subtracted costs,
But the amount of interests has not included the amount of investment in USD the SBV has spent to import raw gold. Nearly US$2.5 billion converted has been lost. The demand for dollars is so large and its impact on the foreign exchange rate cannot be avoided. Gold is a means to absorb the VND after the SBV has used a huge amount of gold to buy the foreign currency under the low credit growth situation.

Besides, another reason is that the commercial banks are mobilising dollars to offset foreign exchange status. Previously, the high interest rate of VND allowed the commercial banks to sell USD to exchange VND for banking loans. But the small difference of the foreign exchange rate makes the banks buy USD to keep the state balanced.

Another reason is the psychological factor that has influenced the fluctuations of the foreign exchange rate. The fact shows that the supply of USD is not in shortage but in Vietnam, the increasing price of dollar or gold make many people rush to buy, causing the artificial scarcity. The policy makes should provide clear direction in order to reduce the expectation of the dollar holders and to cool the price down.
Improvement towards the end of the year?

The high foreign exchange rate in the middle year led many to question whether the loss of VND value still remains in the future, especially at the end of the year, as there is a rising demand for foreign currency.

Although there are many potential risks on the foreign exchange rate, the economists still believe that the foreign exchange rate will be stable and has no major fluctuations. This helps to curb inflation and stabilise the macro-economy.

The reason for this claim is whether the commercial banks on term of June 30 have not settled the gold status, but the gold sales were great so it is time for the SBV limits the gold auction gold to pump gold to the market. The world gold prices are also going down, not stimulating the speculative demand and then, keeping the domestic gold prices down and the domestic demand for gold at stable. This will release the pressure of using dollars to buy gold and stabilize the market.  The huge amount of remittances also poured to the country will help meet the market demands for USD at the end of the year. Above of all, the policy makers should consider the currency devaluation policy because this will support export but it may cause instabilities in price of gasoline, price of electricity and other imported goods from abroad.

Therefore, a resolution of the regular meeting in June has been newly issued by the government with a main content that the SBV is required to follow up the fluctuations of the foreign exchange rate and monetary market to come up with appropriate operations accordingly. The Government requested the SBV to monitor the interest rate in consistency with changes of macroeconomics, currency, and particularly, inflation, to control and regulate the market interest rate at a reasonable level in order to stabilize monetary market and accelerate the credit growth. From the views of the policy makers and market, the concerns about the VND devaluation and rising inflation seem unrealistic.