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July 22, 2008

Vietnam currency drops on fuel price rise

Heavy demand for dollars pushed the Vietnamese dong down by 4.5 percent in black market deals on Monday, as locals feared a fresh spurt in inflation after the government raised fuel

prices by as much as a third, reported Reuters.

Offshore forwards trading priced in a deeper fall in the dong in one-year's time compared with levels on Friday.

Selling dollars for dong is unlawful in Vietnam unless conducted by authorised dealers and banks. Many locals however approach gold shops and money changers to illicitly buy dollars.

"People want to safeguard their wealth against expected higher inflation," a black market dollar dealer said.

One dollar was changing hands for 17,500 dong on the black market, 4.5 percent weaker than 16,700 levels earlier in the day before fuel prices were raised.

"The dollar could go up to as much as 18,000 dong this week as people feel the heat from the higher fuel prices," a private currency dealer said.

In the official market, the dong was traded around 16,700 per dollar, within the 2 percent trading band prescribed by the central bank around a mid-point it sets daily. It set the mid point

on Monday at 16,500 dong per dollar.

The official market and the black market had nearly converged last week, as the central bank's efforts to clamp down on the black market, intervention to defend the dong and restrictions

on banks had led lifted sentiment. The dong had been transacted for as low as 19,000 in the black market in June.

But analysts expect Monday's increase in fuel prices to push Vietnam's annual inflation rate above 30 percent. It hit an annual rate of 26.8 percent in June as food prices soared and has

been in double digits for eight consecutive months.

In the offshore non-deliverable forwards market, the dong weakened to 19,150 per dollar in the one-year tenor, pricing in a 14 percent depreciation. On Friday, the offshore market had

priced in a less than 10 percent drop in the dong in 12 months.

In a related story, DPA news agency reported that Vietnam government  raised retail gasoline prices by 31 percent Monday to reduce state fuel subsidies and bring local prices in line

with international levels, local media said.

The Ministry of Finance announced the decision at a press conference Monday morning. Fuel trading companies will be allowed to raise the price of A92-grade gasoline from 14,500

dong ($0.86) to 19,000 dong ($1.13) per litre, reported the news website

Prices of kerosene will rise 44 percent to 20,000 dong (1.19 dollars) per litre, while diesel fuel will rise 14 percent to 15,950 dong (94.9 cents) per litre, the website said.

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