VietNamNet Bridge – The State Bank of Viet Nam has said that it would closely monitor exchange rate movements and balance of payment figures to manage the rate in a manner that would encourage dong holdings and limit shifting to US dollar holdings.

The central bank made the statement in response to the rising price of the US dollar in commercial banks that hit VND21,035 late last week.

On the black market, the dollar peaked at VND21,300. This was the third time this year the exchange rate has surpassed the VND21,000 benchmark.

The central bank said that the average price for dollars quoted by commercial banks had increased by 0.9 per cent against the beginning of the year, adding that prices had been increasing since April, mainly due to the widened trade deficit and psychological factors.

Cao Sy Kiem from the National Financial and Monetary Policy Advisory Council said the volatile exchange rate was due to ‘psychological' factors following rumours of an exchange rate revision after the central bank reportedly spent over US$1 billion on importing gold.

The State Bank poured foreign currency into the economy to help local banks close their outstanding gold accounts before the deadline on June 30, 2013.

Kiem said exchange rate fluctuations happened when supply and demand for the dollar changes. Demand was unlikely to go up at the moment and there was a plentiful supply, he added.

Senior financial expert Nguyen Tri Hieu said that the current ‘fever' was only short-lived and would be brought down when banks completed the closure of their gold accounts.

The heated forex market was also attributed to the big gaps between interest rates in the dong and US dollar that previously prompted many banks to convert dollar funds into domestic currency. Many of them are now trying to offset their funds by buying dollars given the narrower rate differences.

To stem losses in the dong and promote greater use of the currency, the central bank said it was considering lowering the maximum interest rate that banks could offer on dollar deposits to curb demand for the US currency.

The central bank currently caps rates on dollar deposits for individuals at 2 per cent, compared with 7.5 per cent for the dong.

The interest rate cap on dollar deposits would be cut "sharply," news website vnexpress.net cited SBV Governor Nguyen Van Binh as saying.

Source: VNS