The country's monthly trade deficit widened to $1.9 billion in October from $1.8 billion in September, according to the General Statistical Office in Hanoi. After Vietnam reported a trade surplus through the first quarter, imports now exceed exports by $8.8 billion for the first 10 months of this year.

The recent jump in Vietnam's trade gap has been driven largely by an acceleration in economic growth, which reached 5.8 percent in the third quarter from 4.5 percent in the second. Faster expansion is leading to more imports, both for investment and for consumption, according to HCM City-based fund manager Dragon Capital.

"The recovery continues, but external concerns remain," wrote Paul Gruenwald, the Singapore-based chief economist for Asia for ANZ, in a note dated Thursday. "Worryingly, the trade deficit is still growing."

Measures taken recently by Vietnamese monetary authorities in an attempt to ensure adequate dong liquidity include agreeing with Japan on a foreign-currency loan, Gruenwald said.

Vietnam has been working with organisations such as the Asian Development Bank and the World Bank to arrange more loans to cover declines in foreign exchange, central bank Governor Nguyen Van Giau said last week.

The Japanese loan is likely to be a "one-off," Gruenwald said in a telephone interview Thursday.

'Dried up'

"It's unlikely they can repeat that," he said. "In the past they had more foreign direct investment, more foreign portfolio investment, more remittances, but those flows have dried up significantly this year."

Vietnam's central bank has held its key interest rate at 7 percent since February, and said Wednesday that it doesn't plan to change the rate this year.

"Should the balance of payments remain weak, some combination of higher interest rates to slow demand and currency depreciation to slow imports is likely to be required," Gruenwald wrote in the note.

The official exchange rate of the dong is now about 17,859 per dollar, compared with 17,483 per dollar at the end of 2008.

On the so-called black market, the dong weakened as of Wednesday to 18,690 per dollar, Lao Dong newspaper reported Thursday. Vietnamese banks are facing difficulties in meeting demand for dollars, the newspaper said.

"Given the recent trade deficits, one would expect that to show up as downward pressure in the currency," Gruenwald said Thursday by telephone.

In announcing Wednesday that it would hold its key interest rate at 7 percent until the end of the year, Vietnam's central bank said it would "buy foreign currencies to boost dong liquidity at lenders, when needed," as well as "intensifying its surveillance" of Vietnam's money market.

Bloomberg - November 3, 2009