Tuesday, July 08, 2008

US$ price slightly increases on black market in Vietnam

17:05' 07/07/2008 (GMT+7)

VietNamNet Bridge – The dollar price has unexpectedly recovered after two weeks of falling down. The dollar had been decreasing continuously in price from June 20 to July 4 before unexpectedly increasing to VND17,350/US$1 on July 6 in the afternoon. The dollar remains a mystery.

Analysts have every reason to believe that people’s psychology plays an important role in defining the VND/$US$ exchange rate. After the government announced it would widen the daily forex trading band to +/-1% on March 10, 2008, people expected that the VND would further devaluate.

At that time, continued price increases and high interest rates, high trade deficit and rumours about the removal of the petroleum price subsidisation and about national foreign currency reserves all eroded people’s confidence in the local currency. That explains why people rushed to buy dollars: they wanted to protect their assets.

However, the people’s psychology, once again, showed its role in stabilising the market. Right after the government and State Bank of Vietnam announced good information about foreign currency reserves and committed to take strong measures to curb inflation, confidence in the local currency was restored, and people stopped rushing to buy dollars.

Explaining the dollar price decreases in the last time, analysts say that information about the conflict in the Middle East, which may lead to further oil price increases, has made Vietnamese individual investors rush to inject money in gold instead of holding dollars. Moreover, as the stock market has warmed up, capital now tends to flow into the stock market, which has resulted in a lower demand for the dollar and dollar price decreases.

However, how the dollar will perform in the future remains a question. There are two contradictory arguments about the dollar price tendency.

Some experts believe that the government will let the VND revaluate in order to minimise the impacts of inflation. The experts argue that Vietnam still has to import 90% of materials for making products for export. Foreign capital keeps inflowing into Vietnam, which will make the dollar supply profuse.

Meanwhile, some others believe that the government will further devaluate the VND to encourage exports and limit imports. They believe that the ideal exchange rate would be VND17,000/US$1, while the forex daily trading band should be +/-2%.