UPDATE 2-Vietnam devalues dong to protect exports, offset China’s yuan action

21-Aug-2015 Intellasia | Reuters | 6:00 AM Print This Post

Vietnam devalued the dong on Wednesday for the third time this year as authorities moved to bolster a languid export sector facing fresh challenges from a surprise devaluation of the Chinese yuan.

The State Bank of Vietnam (SBV) said the intervention was also in anticipation of the US Federal Reserve raising rates. It widened the dollar/dong trading band for the second time in a week, underscoring concerns a weaker yuan could further inflame bloated trade deficit.

Vietnam’s economy is closely tied to its communist neighbour, with three quarters of bilateral trade worth $60 billion being imports from China.

Global markets were alarmed when China devalued the yuan by nearly 2 percent on August 11, with analysts fearing a further weakening over coming months and heightened worries of a global currency war.

Vietnam lowered the official mid-point rate by 0.99 percent to 21,890 dong per dollar and widened the trading band for the second time in six days, to 3 percent from 2 percent. The SBV allowed 1-percent currency depreciations in January and May.

ANZ analysts said the devaluation was more aggressive than expected, while HSBC Vietnam welcomed the quick response.

“The move of the central bank is fast and almost unprecedented in Vietnam,” HSBC Vietnam chair Pham Hong Hai said in a statement. “The bank is ready to handle market challenges.”

The dong, among Asia’s most resilient currencies, dropped to 22,380/22,400 per dollar on the interbank market at 0344 GMT on Wednesday, off 1.3 percent from the previous day and down 4.5 percent so far this year. Gold rose 1.3 percent to sell at 34.62 million dong ($1,547) per tael in Hanoi.

TRADE CHALLENGE

The weaker yuan has sparked concern of more Chinese goods flooding Vietnam’s market. Trade with China was in deficit of $19.33 billion in the first seven months of 2015, versus a $14.88 billion deficit a year ago.

Export-reliant Vietnam saw shipments grow 8.9 percent in that period, below the government’s 10 percent target.

The SBV said the dong’s exchange rate had “sufficiently large ground” to be flexible into next year.

Cheaper Chinese exports could pose a challenge as Vietnam’s low-cost manufacturing sector competes with China for orders for clothing brands and electronics firms like Samsung and Microsoft, which has reduced operations in China and shifted some to Vietnam.

With Wednesday’s new band, the dong could fall to 22,547 per dollar in interbank deals, or 2 percent down from the previous day. The dong has now weakened 4.5 percent in interbank and 3 percent on unofficial markets, against the SBV’s pledge to let it slip 2 percent in 2015.

http://www.reuters.com/article/2015/08/19/vietnam-economy-dong-idUSL3N10U1R620150819

 


Category: Finance

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