Vietnam devalued its currency by one percent against the U.S. dollar Wednesday, the third such move this year, as the Southeast Asian country tries to safeguard export growth in response to the sharp weakening of the Chinese yuan and protect itself from a possible U.S. interest rate hike.
"Following the strong devaluation of the Chinese yuan, domestic market sentiment is very much concerned with the negative impact of a United States Federal Reserve interest rate increase," the State Bank of Vietnam, the country's central bank. said in a statement.
Most of Vietnam’s transactions are done in U.S. dollars.
Before the central bank announced the devaluation, Nguyen Van Binh, the bank’s governor, said the government may have to sell foreign currency to intervene in the market, local media reported.
China, the world’s second-largest economy, sharply devalued the yuan by almost 2 percent on Aug. 11, stoking fears in global markets of a global currency war in what the government said was part of market-oriented reforms.
The move sparked concerns that the weaker yuan could increase Vietnam’s trade deficit with its neighbor.
Vietnam’s economy is heavily intertwined with that of China, its largest trade partner and had bilateral trade totaling U.S. $32.1 billion in the first six months of this year, according to China’s Xinhuanet.com, citing figures from Vietnam’s General Statistics Office.
Of that amount, Vietnam’s exports to China were U.S. $7.7 billion, while the country imported U.S. $24.4 billion worth of goods from its neighbor.
Some economists inside Vietnam said the devaluation was necessary but not a viable long-term solution to ease the nation’s trade deficit.
They warned that if Vietnam imported too many Chinese goods, its economy would become even more tied to China’s economy.
“The recent devaluations of the Vietnamese dong have been necessary because Vietnam has a large number of exports to and imports from China, but especially imports from that country,” economist Le Dang Doanh told RFA’s Vietnamese Service.
The devaluation of China’s yuan would have a great impact on Vietnam’s balance of trade, and it would become more difficult for Vietnam to export to its northern neighbor since the price of its goods would rise by 4 percent, he said. In turn, this would have implications for Vietnamese enterprises.
“China has already started a currency war,” Doanh said. “I think this is a beginning of a spiral. We need more time to see and consider in which direction the spiral will go and what China has or loses.”
The central bank weakened the reference rate to 21,890 dong to the U.S. dollar while widening the band within which the dong can be traded to 3 percent from 2 percent for the second time in a week.
Late Wednesday, the dong was trading at 24,500 to the U.S. dollar on the black market, according to RFA’s sources.
Vietnam’s central bank had depreciated the dong by one percent in both January and May.
Analysts at Australia and New Zealand Banking Group Ltd. said they expected the dong to weaken by up to 5.1 percent against the U.S. dollar compared to an annual depreciation of about 1.3 percent during the last two years, according to media reports. The dong has now depreciated by 4.5 percent against the dollar.
Reported by RFA’s Vietnamese Service. Translated by KaLynh Ngo. Written in English by Roseanne Gerin.