Vietnam's central bank is letting the country’s currency dong to fall against the dollar, hoping to close the gap between its reference rate and market forces and tap the export benefits due to a softer currency. The State Bank of Vietnam on Monday moved its reference rate for the dong from 21,890 to the dollar to 21,896, announcing that it would begin setting the rate daily by taking into account the movements of the euro, dollar, yen, yuan and other currencies. Cuts have continued nearly every day this week, mirroring a slide by China's currency.
The new policy steps away from the dong's de facto peg against the dollar. The reference rate previously has remained fixed for lengthy periods, with the central bank ensuring that the currency's value stays within a certain trading band, usually a few per cent. The shift comes after months of pressure for a weaker dong, fueled by factors including speculation around US interest rate hikes. The central bank in August widened the allowable deviation from the reference rate to 2 per cent from 1 per cent. That was followed by another expansion to 3 per cent later in the month, alongside a cut to the rate itself.
The conclusion of negotiations on the Trans-Pacific Partnership trade pact in 2015 also gave support for a weaker dong. Vietnam is expected to reap the benefits of TPP membership as its textile industry ramps up exports. A stable currency will boost the country's appeal further as it tries to position itself as a key market in Asia.
