Vietnam devalues dong by 1%, widens trading band to 3%

Today the State Bank of Vietnam lowered the official mid-point rate by 0.99 per cent to 21,890 dong per US dollar and widened the trading band to three per cent from two per cent.

He said a possible Fed rate increase later this year would weaken the appeal of the dong even more. The intraday trading band, which increased from 1% to 2% last week, was further expanded to 3%, making the currency more market-driven. It widened the dollar/dong trading band for the second time in a week, underscoring concerns a weaker yuan could further inflame bloated trade deficit.

The move was a response to the devaluation of the yuan by Beijing and an anticipated interest-rate hike by the US Federal Reserve, the SBV said.

Though the Chinese central bank defended its currency intervention “as a free-market reform”, global experts’ apprehensions of a currency war in the near future, especially among its Asian neighbors, are turning into a reality.

“Some realignment of the currency therefore seems warranted from a macro-balance perspective”, they wrote, adding that the dong could depreciate by a maximum of 5.1 percent in 2015 compared with annual declines of about 1.3 percent in the previous two years.

However, analysts also admit that the dong has been among the most resilient Emerging Asia currencies and that a currency devaluation does make a certain level of sense give the current macro-economic climate.

“The move of the central bank is fast and nearly unprecedented in Vietnam“, HSBC Vietnam chairman Pham Hong Hai said in a statement.

It was the third time the SBV has devalued the dong this year, which has seen a total depreciation of 5% against the dollar.

China is the ninth largest foreign investor out of 103 investors in Vietnam with $8.1 billion worth of registered capital.

“Some 85 percent of Vietnam’s transactions are in U.S. dollars”, he said by telephone from Ho Chi Minh City.

Vietnam’s government is hopeful that the devaluation will help boost exports from the country, which have been suffering in recent months.