Vietnam Devalues Dong for Third Time in 2015 on Yuan Fallout

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Vietnam devalued the dong for the third time this year and widened the currency’s trading band, the latest sign of stress in Asian exchange rates after China depreciated the yuan last week.

The State Bank of Vietnam weakened its reference rate by 1 percent to 21,890 dong a dollar and increased the scope for fluctuations to 3 percent on either side, after doubling the range on Aug. 12. The dong fell 1.2 percent to 22,360 as of 3:04 p.m. in Hanoi, extending its drop this month to 2.4 percent, according to data compiled by Bloomberg. Malaysia’s ringgit leads regional losses so far in August with a 6.4 percent slide.

Prime Minister Nguyen Tan Dung is seeking to safeguard export growth and the State Bank said it’s concerned about the prospect of the Federal Reserve raising interest rates. While the latest devaluation will allow the dong to weaken without pressuring the central bank to intervene, further policy measures can’t be ruled out should the yuan depreciate sharply, according to Australia & New Zealand Banking Group Ltd.

“The policy action today is positive in its promptness in response to China’s devaluation,” Eugenia Fabon Victorino and Irene Cheung, analysts at Australia & New Zealand Banking Group Ltd., said in a research note. “As a preemptive move, the central bank may have taken into account a possible interest rate hike by the Fed in September.”

‘Enough Room’

Vietnam’s government bonds fell, pushing the five-year yield to 6.74 percent, according to a daily fixing from banks compiled by Bloomberg. That’s the highest rate since July 2014.

The widening of the dong’s band last week came a day after China’s surprise policy shift heightened the risk of a currency war. Vietnam posted a trade deficit of $300 million in July as export growth slowed to 9.5 percent in the first seven months of 2015, compared with 14.1 percent a year earlier.

“The dong will have enough room to fluctuate more flexibly to cope with negative impacts from international and domestic markets, not only from now until the rest of the year but also in early months of 2016,” the authority said in a statement on Wednesday.

The Vietnamese currency has declined 4.4 percent this year, putting the country’s exporters at a relative disadvantage to those in nations like Malaysia and Indonesia, whose currencies have fallen 15 percent and 11 percent, respectively.

“The Vietnamese dong has been one of the more resilient currencies amidst the EM Asia currency downdraft of recent months,” according to the ANZ analysts. “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.

Further Devaluations

The latest devaluation will allow the dong to weaken without pressuring the central bank to intervene, according to ANZ. The State Bank could devalue the dong by another 2 percent “in the coming months,” according to a research note released Wednesday by BMI Research in which the company revised its year-end forecast to 23,000.

The central bank said it “will take comprehensive measures” and “is ready to sell foreign currencies when needed to stabilize the money market and keep the dong’s rates within the allowed band.”

Vietnam’s economic growth quickened after its currency was devalued in January and May by 1 percent each time. That followed similar-sized cuts to the fixing in both 2014 and 2013.

‘More Competitive’

Gross domestic product rose 6.44 percent in the second quarter from a year earlier, quickening from a revised 6.08 percent pace in the previous three months, official data show. In the six months through June, the economy grew 6.28 percent.

Vietnam is trying to prop up an economy that it projects will grow 6.2 percent this year after it expanded by 5.98 percent in 2014. China has been Vietnam’s biggest trade partner since at least 2007.

“Today’s move is a very good policy action,” said Le Anh Tuan, chief economist at Dragon Capital Group Ltd. in Ho Chi Minh City. “It will make the currency more competitive and help boost exports.”

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