Vietnam Currency Discussion Board

[RICK C]

Updated: New York, Dec 24 08:23London, Dec 24 13:23Tokyo, Dec 24 22:23

Economy

Bloomberg Press

Vietnam Widens Daily Trading Band for Dong to 0.75% (Update3)

By Beth Thomas and Nguyen Dieu Tu Uyen

Dec. 24 (Bloomberg) -- Vietnam widened the daily trading band for the dong, giving the central bank more scope to slow inflation by allowing the currency to strengthen.

The dong can now trade 0.75 percent either side of a rate set by State Bank of Vietnam each day, compared with 0.5 percent previously, according to Dao Xuan Tuan, head of foreign-exchange management at the bank.

The country has allowed the currency to strengthen by 1.3 percent since Aug. 20 as consumer-price inflation accelerated to a 10 percent annual pace in November, the fastest in more than three years. The dong is little changed in the year, following an 11-year run of depreciation designed to make the nation's exports more competitive.

Vietnam faces ``a dilemma with trade deficits growing and inflation picking up,'' said Masashi Kurabe, head of the foreign-exchange sales & trading group in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., part of Japan's largest lender. ``The country may be aiming to reduce money supply'' by allowing currency appreciation, he added.

The dong gained 0.11 percent to 16,032.5 against the dollar as of 4:25 p.m. in Hanoi. It closed last year at 16,042.5. The central bank has devalued the dong every year since 1995.

The new band is ``to give commercial banks more flexibility in trading the dong and to go more in line with market rates,'' Tuan said in an interview from Hanoi today.

Trading Opportunities

The State Bank set a reference rate for the currency of 16,113 today, 0.4 percent weaker than its current price. The dong strengthened as much as 0.5 percent more than the reference rate on Dec. 21. The central bank last widened the band on Dec. 31, 2006, expanding it from 0.25 percent.

``It's good news for commercial banks,'' Ly Xuan Hai, chief executive officer of Asia Commercial Bank, Vietnam's biggest listed company, said in a telephone interview from Ho Chi Minh City. ``This opens up more opportunities for us to trade the dong now.''

Vietnam's restrictions on trading the dong mean that DBS Group Holdings Ltd. and Australia & New Zealand Banking Group Ltd. have been trading offshore derivatives contracts tied to the future value of the dong, known as non-deliverable forwards.

``A more flexible exchange rate could improve the effectiveness of monetary policy and buffer the economy from the effects of volatile capital flows,'' a report released by the International Monetary Fund and World Bank last week recommended.

Foreign Investment

Demand for Vietnamese stocks and rising foreign direct investment has put pressure on the dong to gain this year. Vietnam's currency strengthened to as much as 15,977 against the dollar on Feb. 13, the most since at least 1993. The benchmark VN Index of stocks reached a record high on March 12.

Vietnam's foreign investment jumped 69 percent this year to $20.3 billion, Thoi Bao Kinh Te Viet Nam reported today, citing the Ministry of Planning and Investment. The government expects economic growth to quicken more than 9 percent next year.

``Direct foreign investment has been increasing in Vietnam,'' said Kurabe. ``With China's employment costs rising, many foreigners are now trying to build factories in Vietnam.''

Hon Hai Precision Industry Co., the world's largest contract electronics manufacturer, plans to invest $5 billion over the next five years in Vietnam to make parts for personal computers, digital cameras and mobile phones. Hon Hai joins Taiwanese companies including Compal Electronics Inc. that have announced plans to set up factories in Vietnam to cut costs.

The trade deficit more than doubled to $10.47 billion from January to November as the country imported more machinery, steel, and fertilizer. The policy of weakening the dong has made the cost of goods that Vietnam imports more expensive in local currency terms.

To contact the reporter on this story: Beth Thomas in Hanoi [e-mail] .

Last Updated: December 24, 2007 04:46 EST