Confidence in dong returns on Vietnam moves, Viet Capital says

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Confidence in Vietnam's dong "seems to have returned" after policy makers launched a series of measures to narrow the gap between the official and unofficial exchange rates, Viet Capital Securities said.

The State Bank of Vietnam capped foreign-currency deposit rates at 3 percent for individuals and at 1 percent for non- credit institutions last month. It also raised the amount of dollar deposits lenders must set aside as cash by 2 percentage points. Some small banks have been collecting as much as $15 million every day from customers wanting the dong, the government said on its website on April 27.

"We have noticed domestic residents have recently shifted holdings from foreign currency to the dong," Marc Djandji, the Ho Chi Minh City-based head of research at Viet Capital, wrote in a note Thursday. "We saw liquidity improve within the interbank market while most banks are now willing to sell dollars to individuals within the trading band."

The dong gained 0.2 percent to 20,610 per dollar as of 4:25 p.m. local time, according to data compiled by Bloomberg. The currency gained 1.8 percent last week.

The State Bank of Vietnam fixed the reference rate at 20,708 on Friday, compared with 20,703 Thursday, its website showed. In the so-called black market, the dong traded at 20,655 at the end of April, a gain of 2.2 percent against the dollar from the end of March, Djandji wrote in the report.

The central bank may buy "large amounts of dollar from the market to build up its international reserves to more comfortable levels" as the dong strengthens, Djandji wrote in the report.

Vietnam's foreign-exchange reserves declined to cover about 1.4 months of imports by the end of December from 1.8 months three months earlier, the International Monetary Fund said in a report on April 28.

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