The State Bank of Vietnam, or the central bank, set the official exchange rate at 16,069 dong per dollar on Wednesday, the lowest since February 20 when it was 16,070 dong per dollar.

Banks are allowed to trade the currencies within a band of +/-1% of the official rate daily on the foreign exchange market.

But on the street, the dollar jumped 5% to 17,800 dong on Tuesday from 16,930 dong on Monday.

"The main reason that led to a strong rise of the US dollar on the free market is due to the dollar buying demand among part of the population," Nguyen Quang Huy, director of the central bank's Foreign Exchange Management Department said.

"This sentiment emerged from some unfavourable information such as the recently published inflation rate in May that continues staying high and there is certainly also a speculative factor," Huy said in a statement on the central bank's website.

Oil fell US$4 to US$128 a barrel on Tuesday, pulled down by the stronger US dollar, and concerns moves to cut Asian fuel subsidies could hurt demand growth.

Vietnam's annual inflation accelerated to 25.2% in May from 21.4% in April, its seventh consecutive double-digit reading and one of the highest in Asia ID:nBKK139303.

Vietnam estimated its trade deficit in the first five months of the year would be US$14.4 billion, more than three times higher than in the same period last year after a jump in imports, the government said on Monday.

Huy said the fluctuation of the dollar value on the free market "can not create changes on the financial, monetary and business activities of the economy".

"The central bank is fully capable of intevening so that the exchange rate would not face major changes," he said in the statement.

The central bank has been buying foreign exchange since last year when a record foreign investment inflow started arriving in Vietnam which joined the World Trade Organisation in January 2007. The purchase has helped nearly double Vietnam's foreign exchange reserves to US$20 billion at the end of 2007, from US$12 billion in 2006, central bank figures show.

Reuters - May 29, 2008