Vietnam's Currency Drops to Limit of Trading Band for First Time

  • Dong can trade up to 3% on either side of central bank fixing
  • State Bank of Vietnam has devalued three times this year

Vietnam’s dong declined to the limit of its current trading band for the first time, reflecting further pressure to weaken after three devaluations already this year.

The currency fell as much as 0.07 percent to 22,547 per dollar in Hanoi, diverging from the State Bank of Vietnam’s daily reference rate of 21,890 by the maximum 3 percent that’s permitted. The official rate has been kept steady since it was last cut on Aug. 19, when the trading band was also widened from 2 percent. The monetary authority had doubled the scope for fluctuations only a week earlier, providing room for depreciation as a devaluation of China’s yuan dragged exchange rates lower across Asia.

The yuan has since lost further ground, sinking to a four-year low in Shanghai in the past week, as the first U.S. interest-rate increase since 2006 supported the dollar. While the dong has weakened 5.1 percent so far this year, it has proven more resilient than the currencies of Southeast Asia’s five biggest economies. Supporting the exchange rate has come at a cost to the nation’s foreign-currency reserves, which tumbled by $6.7 billion to $31 billion in the third quarter, according to Trinh Nguyen, a Hong-Kong based senior economist for emerging Asia at Natixis SA.

“It is not in their interest to wind their reserves down to defend an expensive currency,” she said. “They will benefit by letting the currency depreciate and absorb some of the shock. The SBV will likely try to wait until at least the first quarter of 2016 for any big move.”

Stability Pledge

The State Bank of Vietnam is not required to intervene when the dong hits the limit of its trading band, though it has repeatedly said it is willing to do so to keep the currency stable. Financial institutions that trade outside of the permitted range can be fined. The monetary authority wasn’t immediately available on Wednesday morning for comment on the nation’s exchange rate.

The central bank has seen “positive developments” in the supply and demand of foreign currencies in the Vietnamese money market recently, Deputy Governor Nguyen Thi Hong said in a statement released Dec. 17, citing a 17 percent increase in disbursed foreign investment in November and a trade surplus. Even so, the authority cut the ceiling on dollar deposit rates to zero from 0.25 percent for individual accounts a day later to make it less attractive to hold the U.S. currency.

The dong was at 22,547 per dollar as of 4:06 p.m. in Hanoi. That’s stronger than the currency was trading for on the streets of Ho Chi Minh City, where Foreign Exchange Dealing Agency No. 2 in the central business district was selling dong at 22,690 in afternoon trading and buying at 22,660.

"The dong weakening to the band limit reflects Vietnamese banks’ shortage of U.S. dollars in this year-end period,” said Alan Pham, chief economist at VinaCapital Group Ltd. in Ho Chi Minh City. “The central bank might sell U.S. dollars to banks as it is the quickest way to cool the market.”

Declines Forecast

The interbank rate will weaken by about 2 percent to 23,000 next year, based on the median forecast of analysts surveyed by Bloomberg. It’s depreciated in all but two of the last 20 years, losing 51 percent in that time.

Malaysia’s ringgit tumbled 19 percent versus the greenback this year, Asia’s worst performer. The Philippine peso fell 5.3 percent, Thailand’s baht weakened 8.8 percent and Indonesia’s rupiah declined 9.2 percent, according to data compiled by Bloomberg. Strengthening demand for dollars led to developing nations including Argentina, Azerbaijan and Kazakhstan scrapping currency controls and adopting freely floating exchange rates.

“We are looking for 2 percent depreciation in the dong against the dollar in 2016; this is partly due to a weaker yuan,” Ju Wang, senior Asian foreign-exchange analyst at HSBC Holdings Plc in Hong Kong, said Monday. “Most other Asia currencies have more flexible exchange-rate regimes, which allow them to adjust to market forces naturally.”

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