Fear of “currency war” sparks devaluation of dong

The Vietnamese currency remains relatively robust compared to regional competitors. Picture courtesy AFP

The Vietnamese currency remains relatively robust compared to regional competitors. Picture courtesy AFP

Vietnam’s devaluation of its currency this week is being seen as an attempt to keep weakening exports competitive in the light of the nearly two per cent devaluation by China on August 11.

Despite much heated talk of currency wars following the Chinese move, analysts said the move by the State Bank of Vietnam should not be seen as overly aggressive.

There have been much larger depreciations of other regional currencies this year.

The dong was devalued by one per cent against the US dollar and the trading band was increased from two to three per cent, the second such increase in a week.

It is the third time Vietnam has devalued its currency this year – but the five per cent fall in the dong since January is still relatively modest compared to currency falls in Thailand, Indonesia and Malaysia.

China’s devaluation of the yuan by two per cent last week sent a shudder through the global economy.

The two countries are major trading partners and also compete as low cost manufacturers and exporters. A weaker yuan makes Vietnamese products more expensive in overseas markets and makes China more attractive to foreign investors.

Analysts say it’s not surprising the Vietnamese government reacted given the climate of competitive devaluations.

However they say the relatively modest move indicates that Vietnam is not keen to take part in a race to the bottom.

Increasing imports and a slowdown in export growth have led to concern about the trade balance.

The weakening dong may also help stimulate the struggling tourism sector – with tourist visits down by 11 per cent in the first six months of the year.

Vietnam posted a trade deficit of US$3.53 billion in January-July, compared with a US$1.59 billion surplus the previous year.

The weaker yuan has led to fears that more Chinese goods could flood the Vietnamese 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,” said the State Bank of Vietnam in a statement.

Vietnam’s trade deficit with China has surged to US$19.33 billion so far this year.

With Wednesday’s new band, the dong could fall to 22,547 per dollar in interbank deals, or two per cent down from the previous day.

The central bank’s move was also intended to preempt the impact of expected monetary tightening in the United States.

Vietnam’s export growth slowed to 9.5 percent in the first seven months of 2015, compared with 14.1 percent a year earlier.

Vietnam is anxious to prop up economic growth which is forecast at a little over 6 percent this year.