July 8 (Bloomberg) -- The Vietnamese dong rate in the black market has strengthened towards the official level after the government released more dollars into the economy and cracked down on state banks' currency transactions.
The dong, allowed to trade 2 percent either side of a daily reference rate set by the central bank, traded at 16,849.50 per dollar at 4:15 p.m. in Hanoi. The black market rate is now about 2 percent away from the allowable range, according to JPMorgan Chase & Co. The gap was as wide as 10 percent in June.
``Their measures have been more aggressive in bringing the two markets in line,'' said Matthew Hildebrandt, an economist at JPMorgan in Singapore in an interview today.
Vietnam's financial markets tumbled this year after the central bank raised its benchmark interest rate three times to 14 percent to tame inflation that accelerated to a 16-year high of 26.8 percent in June. The gap between the twin rates also narrowed as the State Bank of Vietnam widened the dong's daily trading band from 1 percent on June 27 and allowed the currency to drop almost 5 percent this year.
``Now people have a bit more confidence,'' Michael Pease, chairman of the American Chamber of Commerce and general director of Ford Vietnam Ltd. said in an interview on July 2. ``A manager from a local company was telling me the other day that all his employees are complaining that every time they need to pay a bill, they have to change their dollars into dong because all their savings are in dollars.''
The black market rate commonly refers to the rate offered by street money changers, while state banks use so-called parallel rates by adding fees or conducting multiple currency exchanges. The central bank threatened to fine banks and money changers which violate regulations.
Gold shops and street money changers in the old quarters of Hanoi were charging 17,150 dong to the dollar today, or 1.7 percent away from the official rate, closer to the inter-bank parallel market rate of 17,200, which Hildebrandt suggested.
Black-market demand won't dry up for now, Hildebrandt said.
``These two rates won't converge until confidence returns,'' Hildebrandt said. ``They need to use more market- based measures like providing sufficient amounts of liquidity to the market instead of relying on administrative measures.''
Morgan Stanley wrote in a report this week that intervention by Vietnam, India and South Korea to strengthen their currencies will fail. It estimates Vietnam's currency reserves to be $27 billion.
`Bearish' on Dong
The dong will decline to 17,500 to the dollar by the end of the year, said Thomas Harr, a Singapore-based currency strategist at Standard Chartered Bank.
``We remain bearish on the Vietnamese dong due to the high inflation, the very wide trade deficit and the government's preference for a weaker currency,'' Harr said.
The trade deficit in the first six months widened to $14.8 billion, up from $5.2 billion a year earlier.
Imports have slowed due to a package of measures including interest-rate increases, according to a report dated yesterday from Moody's Economy.com, a unit of New York-based Moody's Corp. Vietnam imported $6.8 billion of goods in June, according to preliminary government figures, from $7.9 billion in May.
Traders are pricing in an 18 percent decline in the dong in the coming year to 20,500 per dollar, according to offshore 12- month non-deliverable forwards. On June 18, the rate was as high as 24,900. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars.
The dong's unofficial rate gained to 17,500 by the end of June, compared with 19,400 in the middle of the month, according to Dragon Capital, a Ho Chi Minh City-based investment fund.
``The dong was at all times well above the very dubious non-deliverable-forward rates that investment banks have been so focused on,'' Bill Stoops, head of research at Dragon, wrote in a note to investors dated July 4.