Vietnam dong exchange rate: how the central rate works

The Vietnam dong exchange rate is not set by the market alone. Each day the State Bank of Vietnam announces a central rate for the US dollar. Banks then trade within a band around that rate, set at 3 percent above and below when the system began in 2016. This guide explains the system in plain words and shows how a firm can plan around it.

What the central rate is

The central rate is the dollar price in dong that the State Bank publishes each working day. It is a reference point. It is not a price you can always buy at. The State Bank has changed the allowed range from time to time. In February 2011, for example, it narrowed the range for commercial banks from 3 percent to 1 percent.

The State Bank began announcing this daily central rate on 4 January 2016, when it set the first one at 21,896 dong per dollar. Before that, it had used fixed rates and trading bands. In 2015 the bank devalued the dong three times, by one percent each time, and widened the band from one percent to three percent.

Sources: Tuoi Tre News, "Vietnam begins setting central rate for VND-USD transactions in de-dollarization bid" (4 January 2016); VietStock, same story (January 2016); VietnamNet, "Central bank devalues dong by 9.3 percent" (February 2011), for the 2011 band change.

How the 3 percent band works

The band is the space around the central rate in which banks may quote. At the start in 2016 it was 3 percent above and 3 percent below, and it is worth checking the current figure with your bank. Take a simple example with round numbers. If the central rate were 20,000 dong per dollar, a bank could quote anywhere from 19,400 to 20,600. The figures are only an illustration. They are not a real quote.

The band keeps day to day moves small. Banks cannot trade outside it. So the highest and lowest price on any day is known once the central rate is out. On 4 January 2016, for example, banks could trade between 21,239 and 22,553 dong per dollar.

Sources: VietStock (4 January 2016), for the three percent band, the first-day range and the 2015 band changes.

Why the dong is called managed

The dong is not freely convertible. Wikipedia describes it as loosely pegged to the US dollar through a crawling peg, which lets the rate adjust gradually. Economists call this a managed system. The market has a say, but only inside the limits the State Bank sets.

It also means policy can change. The State Bank can move the central rate faster, or widen or narrow the band, if it sees a reason. A firm should not assume that today's rules last forever.

Sources: Wikipedia, "Economy of Vietnam" (exchange rate section, as archived January 2020), for the crawling peg and limited convertibility.

What this means for pricing and contracts

A steady rate helps planning, but it does not remove risk. If you sell in dollars and pay costs in dong, a small slide in the dong helps you. If you buy goods in dollars and sell in dong, the same slide hurts you. Over a year, even small daily moves add up.

• Choose one currency for each contract and write it down. Say clearly whether the price is in dollars or in dong.
• If a price is in dollars but paid in dong, state which rate applies and on what day.
• Keep a note of the rate you used when you made each quote.
• For long contracts, add a clause that lets both sides review the price if the rate moves past an agreed point.

These are general business tips. They are not legal or financial advice. Check the exact wording with your bank and your lawyer.

Where to check the rate

The State Bank of Vietnam announces the central rate each working day. Your bank will also show its own buying and selling prices. Those prices sit inside the band and are not the same as the central rate. Banks add a spread, so the price you pay is higher than the rate they pay you. Compare two or three banks before a large transfer, and ask what fee applies.

A good habit is to look at the central rate at the same time each week and keep a short log. After a month you will see how fast it moves. That gives you a realistic range for your own budget and quotes.

Sources: Tuoi Tre News (4 January 2016), for the daily announcement of the central rate by the State Bank of Vietnam.

Key points to remember

• The State Bank announces a central rate each working day.
• Banks trade within a band around it. It was 3 percent above and below in 2016.
• The dong is managed. It moves slowly, but rules can change.
• Name the currency and the rate date in every contract.

Sources: Tuoi Tre News and VietStock (January 2016); Wikipedia, "Economy of Vietnam".