Vietnam: Central Bank devalues dong, widens trading band
August 19, 2015
On 19 August, the State Bank of Vietnam (SBV) announced an adjustment to the average inter-bank VND/USD exchange rate, raising the rate from 21,673 VND/USD to 21,890 VND/USD, the equivalent of a 1.0% increase. The Bank also decided to widen the exchange rate trading band from +/-2.0% to +/-3.0%, spreading the floor and ceiling exchange rates to 21,233 and 22,547 VND per USD, respectively. The move follows two prior devaluations of the dong this year of 1.0 percentage points each in January and May.
The move to devalue the currency comes in response to the depreciation of the Chinese yuan earlier this month, and will help support Vietnam’s external position as currencies in the region lose ground against the greenback. A weaker dong also means the SBV is able to use less resources in order to maintain the exchange rate as strengthened expectations of the Fed’s interest rate hike later this year put downward pressure on the currency.
The decision to widen the dong’s trading band follows a similar action on 12 August to expand the band from +/-1.0% to +/-2.0% around the previous midpoint of 21,673 VND/USD. The SBV had defended that decision stating that a stronger recovery in the U.S. and uncertainty in Europe over the Greek debt fallout, as well as other external factors, required a more flexible trading band.
The list of adjustments made by the SBV in August is indicative of a host of pressures affecting Asian forex markets. With these changes, the SBV hopes to safeguard the dong against fluctuation in domestic and international markets, and maintain the competitiveness of Vietnam’s exporters.
Author: Robert Hill, Economist