Vietnam buys $1 billion, plans to keep dong stable

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Vietnam bought $1 billion from financial companies in the past month amid a "relatively abundant" supply of the US currency, and plans to keep the dong stable for now, the central bank said.

"Credit institutions have not only managed to buy enough foreign exchange to fully meet customers' demand, but they have also had a surplus to sell back," the State Bank of Vietnam said in a statement on its website Thursday.

The central bank is seeking to bolster market confidence after the benchmark VN Index of shares dropped 6 percent in a five-day drop, as Europe's debt crisis prompted investors to spurn developing-nation assets. Policy makers have devalued the dong twice in the past six months, narrowing the gap between the official and black-market rates from as much as 12 percent.

"With quite a lot of pressure recently on emerging-market currencies to drop because of the European debt crisis, the Vietnamese central bank probably doesn't want the dong to fall too much," said Hideki Hayashi, a global economist at Mizuho Securities Co. in Tokyo. "They want a weaker currency for sure, but they don't want market players to attack the currency too much given the current crisis."

The currency traded at about 19,105 against the dollar in the so-called black market on Thursday, weakening from around 19,040 yesterday, according to a telephone information service that cites prices at gold shops. The dong was 0.1 percent stronger in the interbank market at 19,003 at 1 p.m. in Hanoi. It has fallen 5.9 percent since Nov. 25. The central bank may not devalue the dong while Europe's debt crisis persists, Hayashi said.

The VN index dropped 0.1 percent to close at 518.93, completing the longest declining streak since the five days ended Nov. 26, when the central bank first devalued the dong.

Reserves fall

Vietnam aims to limit its trade deficit to no more than 20 percent of exports, the State Bank said May 5. The gap was $4.65 billion in the first four months of the year, equivalent to 23 percent of overseas sales, and in April widened 8 percent from the previous month to $1.25 billion as an expanding economy drove an increase in imports.

Vietnam's reserves slid to $15 billion in 2009, from about $23 billion at the start of the year, a decline that may partly have stemmed from central-bank intervention to support the dong, Yumiko Tamura, deputy country director for the Asian Development Bank, said April 13. Policy makers can try to influence exchange rates by buying or selling foreign exchange.

An improving economy is helping to support the dong, the central bank statement Thursday said.

"Even though the trade deficit is still high, foreign-currency sources are expected to improve this year, especially tourism and remittances," Deputy Governor Nguyen Van Binh said on May 10 in a phone interview from Hanoi. "Foreign indirect investment capital inflows show signs of increasing also."

Exports, inflation

Gross domestic product expanded 5.8 percent from a year earlier in the first quarter, after increasing 5.3 percent in 2009, and the government is targeting growth of 6.5 percent this year. The consumer price index rose 9.46 percent in March from a year earlier, the fastest pace in a year, before gains eased to 9.23 percent last month.

"I don't see any significant risk of further devaluation in the near term as it seems the liquidity situation has improved," said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc. "Six to nine months ahead, the risk is for further weakening in the dong against the US dollar because the trade deficit will widen and there's a bit of inflation risk coming back."

His bank predicts the dong will decline to 20,000 per dollar by the end of the year.

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