Vietnam Weakens Dong Fixing as It Adopts Market-Based Rate

Vietnam Weakens Dong Fixing as It Adopts Market-Based Rate

by Nguyen Dieu Tu Uyen

January 3, 2016, 6:02 AM PST January 4, 2016, 2:36 AM PST

    Reference rate to take into account major currencies' moves
    Central bank devalued dong fixing three times in 2015

The State Bank of Vietnam reduced the dong’s reference rate for the first time since August, after saying over the weekend that it is moving to a more market-based methodology in setting a daily reference rate versus the dollar.

It lowered the fixing by 0.03 percent to 21,896 against the greenback on Monday, after the currency sank to the limit of its permitted trading range in late December. The monetary authority had kept the rate unchanged since Aug. 19, when it cut the fixing by 1 percent and increased the currency’s trading range to 3 percent on either side.

That followed another band widening on Aug. 12. The central bank also cut the reference rate by 1 percent in both January and May of 2015. The currency ended 2015 at 22,495 per dollar, 2.7 percent weaker than the central bank’s Dec. 31 reference rate of 21,890. It closed little changed on Monday at 22,505.

“The dong’s daily reference rate will make it easier for market stakeholders,” Do Ngoc Quynh, Hanoi-based head of treasury at Bank for Investment & Development of Vietnam, said by phone. “It also helps policy makers avoid accumulated pressure on the dong and allows them to be more proactive in coping with changes in global markets.”

New Mechanism

The move comes as tightening monetary policy in the U.S. boosts demand for the greenback and a depreciating yuan drags currencies lower across Asia. The dong’s 4.8 percent loss last year compares with slides of 19 percent for Malaysia’s ringgit and 10 percent for Indonesia’s rupiah, the region’s two worst-performing currencies.

Supporting the exchange rate has come at a cost to the Vietnam’s foreign-currency reserves, which tumbled by $6.7 billion to $31 billion in the third quarter, according to Trinh Nguyen, a Hong-Kong based senior economist for emerging Asia at Natixis SA.

The new methodology will calculate the daily reference rate based on a weighted average of dong prices in the interbank market the previous trading day and prices of eight major foreign currencies at 7 a.m. in Hanoi, Bui Quoc Dung, head of monetary policy at the central bank, said at a briefing in the city on Monday. The eight currencies are from the U.S., China, European Union, Japan, Taiwan, South Korea, Thailand and Singapore, he said.

The State Bank will also introduce three-month forward sales of U.S. dollars to commercial banks at the daily rate plus an additional 1 percent, Dung said. Commercial banks will be allowed to cancel their forward contracts during the three-month period, he added.

The rate will also reflect domestic and international money-market developments, the central bank said in a statement over the weekend, adding that it is willing to sell dollars to stabilize the money market and ensure the dong can fluctuate within its trading band. It didn’t release a statement on Monday.

https://www.bloomberg.com/news/articles/2016-01-03/vietnam-s-central-bank-will-set-daily-dong-dollar-reference-rate