HANOI / SINGAPORE (Reuters) – After being branded a “currency manipulator” by the United States in December for trying to prevent the dong from rising in value, Vietnam is once again intervening in the foreign exchange markets and using what traders say is an unusual method of doing so according to six people familiar with the matter and a review of an interbank trading announcement.
In early January, the State Bank of Vietnam (SBV) told some local banks that it would suspend its regular US dollar purchases on the spot market, where the trade would be settled within days, according to two senior currency traders and an analyst, all working for local banks and have direct involvement in the traders.
The central bank offered the local banks an attractive deal instead: It would agree to buy dollars at a favorable delivery rate in July, and it would allow local banks to cancel this deal by mid-June if they wished, according to the three sources and a review of trading instructions sent by SBV for such a transaction.
The new method of intervention, not previously reported, put downward pressure on the dong, but without money changing hands immediately, which sources could help avoid drawing US attention to the trade and further consequences for bilateral relations. Click to get a graphic tmsnrt.rs/3aT8V0K
SBV did not respond to requests for comment.
There is no indication that Vietnam has done anything wrong. Many central banks regularly intervene in the foreign exchange markets. Vietnam has consistently said that its monetary policy aims to maintain stability and control inflation and not seek trade benefits.
“We have nothing public to share at this time,” a Treasury official said in an email response to Reuters inquiries about Vietnam’s foreign exchange policy.
Vietnam, which has seen an increase in export-led growth in the manufacturing of electronics and other commodities, has increasingly shifted to the Southeast Asian nation, particularly from China after its trade war with Washington.
A higher value of dong due to its trade surplus could hurt this growth in the midst of a pandemic.
Nguyen Xuan Binh, research director at KB Securities in Hanoi and familiar with the traders but not directly involved in them, said the delayed delivery of dollars meant that Vietnam’s central bank could avoid triggering one of the conditions behind the US brand : purchase of dollars for six of 12 consecutive months.
The Treasury’s half-yearly report to Congress examining the major trading partners’ exchange rate policies said in December that Vietnam’s currency management was aimed at creating “unfair competitive advantage in international trade.”
It said Vietnam met all the conditions that trigger the currency manipulator designation, including “persistent, unilateral intervention” in the foreign exchange market.
The stakes are high for Vietnam, as further intervention under the currency manipulator label could trigger a US response, such as new tariffs on its goods. The next US review is scheduled for April.
During its January offer, SBV offered the local banks an over-market rate of 23,125 dong per share. Dollars according to the three sources and written trade announcements sent by the central bank. This rate is a premium of approx. 0.5% on current spot prices.
If dong were to rise further between January and June, it would increase the premium over spot prices to banks. And if dong were to weaken to below 23,125, they could then cancel the deal and instead sell dollars on the spot market.
Reuters could not determine the size of SBV’s intervention, but the three traders said it was large enough to create demand for dollars in the market, which put downward pressure on dong.
The value of the currency in the black market, where dong is often traded in the real economy, has fallen 1.1% as traders said the dollar supply may have dried up.
SBV’s new transactions are similar to financial derivatives known as futures, which bind the parties to exchange currencies at a future date at an agreed exchange rate, the three sources said.
Forward contracts provide central banks with several benefits. They do not require cash in advance and can help smooth out sudden shifts in reserves. In fact, they are popular with other Asian central banks, such as those in India, Taiwan and South Korea.
However, four of the people familiar with the transactions said that SBV’s agreements were not typical futures contracts, as they allowed the banks to cancel the agreement without significant costs.
Two of them said that SBV had previously offered similar options around 2015, although it had then sold dollars forward to try to support a sliding value of the dong.
When SBV previously preferred to use three-month futures contracts, all six sources familiar with the transactions said the shift to a longer time frame indicated a desire to buy time before the intervention drew U.S. attention or pressure.
SBV did not respond to questions about its approach.
Reporting by Phuong Nguyen in Hanoi and Tom Westbrook in Singapore. Additional reporting by James Pearson and Khanh Vu in Hanoi and David Lawder in Washington. Editing by Vidya Ranganathan, Paritosh Bansal and Edward Tobin
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