11:28 | 05/05/2016 Finance - Banking
(VEN) - The State Bank of Vietnam (SBV) has claimed that the domestic foreign currency market has weathered the first three months of applying a daily central exchange rate without difficulty. The SBV will let the exchange rate float freely if the Vietnamese financial market strongly develops.
The SBV has announced the daily central exchange rate since the beginning of the year. The central rate is calculated on a basis of a weighted average of Vietnamese dong prices in the interbank market on the previous day’s trading against the prices of major foreign currencies. According to the SBV, after three months of applying a new exchange rate management method, although the international financial markets have faced many difficulties, the domestic exchange rate and foreign exchange market have shown positive signs.
Business Development Institute Director Le Xuan Nghia said that the application of a new method has proved its efficiency. The SBV has been completely active in maintaining stability for exchange rate.
The SBV’s Monetary Policy Department Director Bui Quoc Dung said that exchange rate in the market has rapidly fallen after a quarter of applying the new management method. The central rate reduced by VND200 per US dollar by April 7 compared to the first day of announcement. In addition, liquidity has improved, while foreign currency speculation has strongly fallen.
“In the context of fluctuations facing the international financial markets, the domestic foreign exchange market has maintained its stability, proving a success in applying the daily central exchange rate to help absorb external shocks and minimize negative impacts,” Le Xuan Nghia said.
Actively directing the market
Many market analysts believe that the SBV should freely float foreign exchange rates. However Dung said, “The current exchange rate mechanism is the right choice for an emerging economy like Vietnam.”
He also added that the SBV has not let exchange rate float freely as it could create strong fluctuations in a short period due to speculation, market expectations and the impact of domestic and foreign financial changes. These fluctuations would pose difficulties for businesses, creating a huge pressure on the domestic economy.
The SBV will let the exchange rate float freely if the Vietnamese financial market strongly develops.
The SBV’s Monetary Policy Department Director Bui Quoc Dung said that the current exchange rate mechanism allows Vietnam to more rapidly react to market fluctuations, ensuring the competitiveness of Vietnamese goods in the international market. It has also helped prevent extreme effects on exchange rate, creating favorable conditions for the development of trade and production activities.