December 1, 2010 / 5:28 AM / 7 years ago

UPDATE 1-Vietnam PM calls for "strong" steps to control the dong

(Adds detail, context)

HANOI, Dec 1 (Reuters) - Vietnamese Prime Minister Nguyen Tan Dung has told the central bank to take “strong” steps to stabilise the foreign exchange and gold markets, and requested the finance ministry to implement price controls on certain goods.

The calls came as the dong weakened to 21,470/21,570 per dollar on unofficial markets, nearly 10 percent below the legal limit mandated by its trading band, and as forecasts put full-year inflation above 10 percent. The official government target is 8 percent.

The State Bank of Vietnam should “implement in a timely manner strong and effective measures to ensure the control and stability of exchange rates, gold prices and interest rates”, Dung said in instructions issued on Tuesday, according to the government’s website,

Unlike other currencies in that region that have been strengthening on the back of U.S. quantitative easing, the dong has been slipping under domestic pressures including rising inflation, a persistent trade deficit, soaring gold prices and widespread expectations of its weakness.

Gold prices and the dong are strongly correlated: when gold prices rise the dollar tends to gain against the dong onshore.

On Wednesday, gold was trading in Hanoi at 36.27/36.37 million dong per tael, putting it on par with global gold prices . One tael equals 1.21 ounces.

The central bank should cooperate with provincial authorities to investigate and handled cases of speculation, illegal gold trading and foreign exchange market manipulation, Dung’s instructions said.

It gave no further details.

In early November the authorities said they would not devalue the beleaguered dong before at least Tet, the Lunar New Year festival, which falls in early February 2011, pledging instead to tap foreign exchange reserves to meet dollar demand.

The central bank also raised its three policy interest rates by 100 basis points on Nov. 5, and also granted fresh gold import licenses and quotas to narrow a gap between domestic and global prices that traders said had fuelled dollar demand.

The dong has slipped steadily since, however, putting the central bank and the government, which approves policy, in a tight spot.

Dung’s instructions also ordered the finance ministry to keep prices for electricity, coal for power production, cement, fertiliser and other goods stable, while using “financial, monetary and tax measures” to stabilise prices of petrol.

The ministry should also “resolutely stop the registration of price increases of goods and services subject to price registration if the increases are unreasonable”, it said.

That final measure could raise concern among the foreign and local business community, which have spoken out against a finance ministry circular that took effect at the start of October requiring companies to register prices on a range of products, including milk and cement, and threatening price controls.

Vietnam’s consumer price index this month will rise 1.3-1.5 percent from November, bringing annual CPI growth to over 10 percent, Wednesday’s edition of the state-run newspaper Tuoi Tre quoted deputy industry and trade minister Ho Thi Kim Thoa as saying.

Consumer prices in Vietnam traditionally rise in the fourth quarter and in the run-up to Tet.

(Reporting by John Ruwitch; Editing by Miral Fahmy)

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