The U.S. dollar last Friday lost 195 dong per dollar in value from a week earlier and 285 dong from the start of this year, according to the Ministry of Finance-run Thoi Bao Tai Chinh (Financial Times) newspaper.
At the close on January 29, Vietcombank quoted the greenback at 22,165 dong-22,235 dong for buying and selling, respectively, down 50 dong from a day earlier. USD prices at other major commercial banks moved in the similar range.
The USD/VND rate last week dropped to its lowest level since August 19, 2015.
Stronger Forex Supply Drives Depreciation of U.S. Dollar
The depreciation of the U.S. dollar against the Vietnamese dong is attributed to a surge in the supply of the greenback.
Inbound remittances to Vietnam were calculated at $12.25 billion in 2015, up 2.1% from 2014, according to the World Bank, making Vietnam the 11th largest remittance recipient worldwide.
Remittances usually rise in the final months of the year, ahead of the Lunar New Year holiday, bankers said.
Remittance inflow to Ho Chi Minh City reached an estimated $5.5 billion in 2015, beating the earlier estimate of $5 billion, said Nguyen Hoang Minh, deputy director of the State Bank of Vietnam (SBV
)’s HCM City branch.
Committed foreign direct investment (FDI), another source of USD supply, jumped 101.2% year-on-year to $1.33 billion in the year to January 2, 2016, according to the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment.
FDI disbursements increased 23.1% year-on-year in the period to $800 million.
In addition, the supply of USD has risen as foreign investors pour cash in Vietnam to carry out sizable mergers and acquisitions (M&A) deals.
Thai brewer Singha has pumped $650 million to acquire stakes in two subsidiaries of Masan Group, a leading food producer in Vietnam.
New SBV Forex Mechanism Takes Effect
SBV Deputy Governor Nguyen Thi Hong attributed the weakening of the greenback to profuse liquidity and weaker demand for foreign currency as local businesses are under less pressure to pay their import bills.
The SBV’s Circular 15, dated on October 5, 2015, has also dampened the demand for USD. The circular stipulates that a business can buy and receive USD if their bills are due in the next two days, otherwise they have to conduct forward transactions.
Le Duc Tho, general director of VietinBank, the largest bank in Vietnam by registered capital, told the Dau Tu (Investment) newspaper that the USD’s depreciation was due to the SBV’s new forex management mechanism, which has been in place since early this year, and USD injections of foreign investors.
“The return to normal of the USD/VND rate has reflected the supply-demand in the market. The stable supply and firm market sentiment have helped solidify the forex rate. The SBV’s clearer orientation has prompted locals and businesses to switch to dong holdings. Moreover, foreign capital and remittance inflows are strong,” Mr. Tho added.
According to the Vietnam Economic Times, the SBV has net bought foreign currency from foreign investors.
Meanwhile, banks have net pumped forex into the market, as they ponder opportunity costs. If they hold forex since late 2015, they may have had losses of 1.3%-1.4%, while interest rates on dong-denominated deposits are going up due to seasonal factors, according to the newspaper.
Bao Viet Securities Company (BVSC) said in a report last week that increases in foreign investment and inbound remittances have helped cool down the USD/VND rate.
“Many have sold foreign currencies over the past week to balance their forex positions on fears for administrative measures that the SBV will take against those banks hoarding forex,” said BVSC.
The brokerage house warned that the cooling down of the USD/VND rate was just temporary. Pressures on the Vietnamese dong from the strengthening of the U.S. dollar and likely further devaluation of the Chinese yuan remain large.