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Buyer Community> Trade Intelligence> Financial Markets> UPDATE 2-Vietnam devalues dong again, this time by over 3 pct
Source: Reuters

UPDATE 2-Vietnam devalues dong again, this time by over 3 pct

Published: 10 Feb 2010 17:15:20 PST

HANOI, Feb 10 - Vietnam's central bank announced its second currency devaluation since November on Wednesday, slashing the dong by more than 3 percent to help balance the foreign exchange market and control the trade deficit.

The dong's mid-point reference rate would be set at 18,544 per dollar on Thursday, a 3.25 percent depreciation according to the IMF method of calculating currency devaluations from the rate of 17,941, where the State Bank of Vietnam has kept the dong since Dec. 10, it said in a statement.

The central bank also imposed a 1 percent ceiling on interest rates on dollar deposits at banks by "economic institutions", not including credit institutions, to try to flush more greenbacks into the market.

The non-convertible Vietnamese currency is allowed to trade within a band of 3 percent on either side of the mid-point the central bank sets daily, although for more than a year it has been beyond the band's weak end on unofficial markets, betraying a weakness rooted in a lack of confidence and a dollar shortage.

On Nov. 26 the central bank devalued the beleaguered dong by more than 5 percent, narrowed the band to 3 percent from 5 percent and announced an interest rate rise to try to stabilise the market.

The devaluation announced on Wednesday was designed to help balance supply and demand of foreign exchange, increase the liquidity of foreign exchange in the market and contribute to controlling the trade deficit and stabilising the macroeconomy, the central bank said in a statement.

The dong has been under pressure for months, in part because of a shortage of dollars in the system, but also because of a widespread lack of confidence in the currency made worse by a widening trade deficit and expectations of high inflation.

Vietnam estimated its trade deficit in January was $1.3 billion, with imports leaping 87 percent and exports rising 28 percent. January inflation was 7.62 percent, already exceeding a government target for the whole year of 7 percent.

The devaluation comes just days before the Lunar New Year festival, or Tet, which is Vietnam's biggest holiday, a time when cash is in demand and bank liquidity is under pressure.

HSBC, in its latest report on Vietnam, released on Monday, said pressure on the dong would persist without action.

"Without further proactive policy moves and without fundamental FX regime reform, the VND will likely face ongoing depreciation pressure," foreign exchange strategist Daniel Hui wrote.

"Sentiment will continue to be weighed down by rising year-on-year inflation rates, which we expect to reach double-digits by 2Q."

Non-deliverable dong forwards were pricing in further depreciation, with the six month contract quoted at 19,280/20,080 dong per dollar. On the unofficial market, such as in gold shops that double as foreign exchange dealers in Vietnam, the dong was quoted at 19,180/19,250 earlier on Wednesday.

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