Vietnam devalues dong to protect exports, offset China's yuan action

Vietnam's central bank  lowered the official mid-point rate of the Vietnamese dong against the US dollar by 1 per cent on Wednesday, Aug 19.
Vietnam's central bank lowered the official mid-point rate of the Vietnamese dong against the US dollar by 1 per cent on Wednesday, Aug 19.PHOTO: BLOOMBERG NEWS

HANOI (REUTERS) - Vietnam devalued the dong for the third time this year on Wednesday (Aug 19), as authorities sought to support a languid export sector facing fresh challenges from a surprise devaluation of the Chinese yuan.

The State Bank of Vietnam, the nation's central bank, also widened the dollar/dong trading band for the second time in a week, underscoring concerns a weaker yuan could further inflame a bloated trade deficit.

China, Vietnam's top trading partner, rattled global financial markets when it devalued its currency by nearly 2 per cent on Aug. 11, heightening worries of a global currency war.

On Wednesday 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 3 per cent from 2 per cent.

The dong stood unchanged at 22,085/22,105 per dollar on the interbank market at 0322 GMT, while on the unofficial market it fell to 22,250/22,400 per dollar, from 21,840/21,870 on Tuesday.

Export-reliant Vietnam posted a trade deficit of US$3.53 billion (S$4.96 billion) in January-July, compared with a US$1.59 billion surplus in the year-ago period. Shipments grew 8.9 per cent in the first seven months, below the government's 10 per cent target.

The weaker yuan has sparked concern of more Chinese goods flooding the southern neighbour's market, putting further pressure on the trade balance.

"The Vietnamese dong's exchange rate now has sufficiently large ground to be flexible in front of adverse impacts on the international and domestic markets not only from now to the year end, but also to the first months of 2016," the central bank said in a statement.

The moves help "ensure the competitiveness of Vietnamese goods," it said.

Vietnam had a trade deficit of US$19.33 billion with China in the first seven months of 2015, versus a deficit of US$14.88 billion a year ago.

"The devaluation is reasonable since many countries competing with Vietnam in export have devalued their currency," said Nguyen Thanh Lam, deputy manager of retail division at Maybank Kim Eng Securities.

The previous mid-point rate had been in place since May 7 when the central bank allowed a 1-per cent currency depreciation. The first devaluation in 2015 was also 1 per cent on Jan. 7.

With Wednesday's new band, the dong could fall to 22,547 per dollar in interbank deals, or 2 per cent down from the previous day. The band had been doubled to 2 per cent on Aug. 12.

The dong has now weakened around 3 per cent in both the interbank and the unofficial markets, against a central bank's pledge to let the currency slip 2 per cent in 2015.