The State Bank of Vietnam devalued the dong by weakening its reference rate for the currency by 1 percent to 21,246 per dollar, according to a statement on its website late yesterday. The change, effective today, allows the dong to fluctuate as much as 1 percent on either side of the central bank’s fixing.

The dong fell 0.4 percent to 21,320 as of 11:23 a.m. in Hanoi and touched 21,360 earlier, prices from banks compiled by Bloomberg show. That was the biggest drop since the currency was last devalued, also by 1 percent, on June 28, 2013. The central bank has said several times this year that it aims to weaken the dong as much as 2 percent in 2014. The benchmark VN Index (VNINDEX) of shares fell 0.6 percent.

“This move is expected, even though the fundamental macro situation is pretty stable,” said Lai Tat Ha, head of currency trading at Hanoi-based Vietnam Technological & Commercial Joint-Stock Bank. “It’s because the dong’s exchange rate had been anchored for a year and the government is seeking ways to boost exports.”

Violent Protests

Vietnam’s policy makers are trying to bolster an economy that the World Bank estimates will grow 5.4 percent this year, slower than a government target of 5.8 percent. Last month’s violent protests following China’s placement of an oil rig in disputed waters halted production at foreign-owned factories and caused Chinese workers to flee. The government will closely monitor sectors that may be affected and take “suitable actions,” Deputy Prime Minister Nguyen Xuan Phuc said June 12.

“After adjusting the dong’s exchange rate, the State Bank will take comprehensive measures and use monetary tools to ensure the stability of the foreign currency market,” the monetary authority said in the statement

The dong’s 1.5 percent decline over 12 months, compares with drops of 17 percent for Indonesia’s rupiah, 4.4 percent for Thailand’s baht and 2.1 percent for Malaysia’s ringgit.

Consumer-price gains have stayed below 5 percent in the last four months, official data show. The government is targeting a 10 percent increase in exports this year to $145.4 billion. Overseas sales rose 15.4 percent in January through May from a year earlier.

Vietnam had a balance-of-payments surplus of more than $10 billion over the same period, the central bank said in yesterday’s statement.

Contingency Plan

“Given that inflation was curbed to a low level in the first five months and the dong was kept stable over the past year, the central bank adjusted the dong’s exchange rate in order to help achieve the government’s economic targets,” the monetary authority said in the statement.

While China is Vietnam’s largest trading partner, the country must reduce its dependence and develop a contingency plan to cope with any “hiccups, turbulence,” Vietnam Chamber of Commerce and Industry Chairman Vu Tien Loc said in May. Prime Minister Nguyen Tan Dung said in an interview last month that his administration had prepared evidence and was ready for legal action against the world’s second-largest economy over the placement of the rig.

By Nguyen Dieu Tu Uyen - Bloomberg - June 19, 2014