Vietnam sees evidence of 'dollar hoarding' amid FED rate increase speculation

There is evidence that U.S. dollars are being hoarded in Vietnam, apparently because of a possible interest rate hike by the U.S. Federal Reserve (FED).

The U.S. dollar is currently able to be traded in Vietnam within a band of VND21,233 and VND22,547, following the latest forex rate adjustment by the State Bank of Vietnam in August.

Most major local banks have quoted both bid and ask prices at the ceiling rate since the beginning of this week, as demand to buy the greenback soared sharply.

On Wednesday, Vietcombank was buying the greenback at VND22,517, down VND30 from the previous afternoon, and selling it at VND22,547.

On the unofficial market, a dollar was sold at VND22,780 and purchased at VND22,680 on Tuesday.

The recent development in the U.S. dollar market in Vietnam indicates that people are hoarding the currency, according to economic expert Nguyen Tri Hieu.

“There is the psychological factor that people are concerned about the possible FED rate increase,” Hieu said.

“And the objective factor is that demand for U.S. dollars usually rises at this time every year as businesses need to clear debts and payments.”

The FED began a two-day meeting on Tuesday at which it is expected to end an era of loose U.S. monetary policy, which began with a devastating recession eight years ago, and to raise rates in an increasingly normal economy, Reuters reported on Wednesday.

The final decision is set for release on early Thursday, with markets prepared for an initial 25 basis point "liftoff" that would move the FED's target rate from zero to a range of between 0.25 and 0.50 percentage points, according to Reuters.

The FED had been expected to adjust its rate in September but eventually kept it at zero.

Also in September, the State Bank of Vietnam said its policy on stabilizing the exchange rate would not be influenced regardless of any FED rate hike.

The Vietnamese central bank said it would keep the VND-USD exchange rate stable until this year-end, after devaluing the Vietnamese currency via three official exchange rate cuts since January 7, each by one percent, and two trading band adjustments.

In August, Vietnam depreciated the dong by one percent for the third time this year and widened the trading band for VND-USD transactions from one percent to three percent, a move the SBV made to cope in the wake of the Chinese yuan’s devaluation.

All of this activity caused the Vietnamese dong to lose five percent of its value against the greenback.

"The Vietnamese dong's exchange rate is flexible enough to protect against adverse market changes at home and abroad not only between now and the end of 2015 but also in the first months of 2016," the SBV said in a statement.

Even so, the market has now fluctuated again as the possibility of a FED rate increase seems more likely than in August.

But Hieu was confident that even when the rate is actually increased, it will be as modest as 0.25 percent.

“The central bank is committed to stabilizing the exchange rate until the beginning of next year so it will have measures to keep the rate stable when the FED rate is hiked,” he said.

“On the other hand, the dollar market in Vietnam will cool down if the FED decides not to increase its rate.”

Associate Professor Tran Hoang Ngan, president of the Ho Chi Minh City University of Finance and Marketing, also said psychological factors are to blame more for the dollar hoarding than the FED.

“The hoarders take advantage of the FED meeting and this season of high demand for the foreign currency to elevate dollar prices,” he said.

“The scale of impact any FED rate rise may have on Vietnam depends on how much [the rate] is increased.”

original source: http://tuoitrenews.vn/business/32262/vietnam-sees-evidence-of-dollar-hoarding-amid-fed-rate-increase-speculation