HANOI, Vietnam — Vietnam allowed its currency to weaken by at least 1 percent Wednesday following the devaluation of the Chinese yuan and the expectation of a possible U.S interest rate hike.
The central bank-set reference rate weakened to 21,890 dong to the U.S. dollar and the trading band within which the dong can be traded was widened to 3 percent from 2 percent, the State Bank of Vietnam said.
"Following the strong devaluation of the Chinese yuan, domestic market sentiment is very much concerned with the negative impact of a United States Federal Reserve interest rate increase," the central bank said in a statement.
It said the bank was widening the trading band — effectively allowing the dong to weaken more — "in order to proactively lead the market and pre-empt negative impacts from the possible Fed rate increase."
Economist Tran Du Lich said the central bank's decision to widen the band to 3 percent was necessary in the current situation. He said a possible Fed rate increase later this year would weaken the appeal of the dong even more.
"Some 85 percent of Vietnam's transactions are in U.S. dollars," he said by telephone from Ho Chi Minh City. "Any move by the Fed therefore will always have some impact on Vietnam's currency exchange policy."
The VN Index, the country's main stock exchange index, fell nearly 2 percent by late morning Wednesday before bouncing back to close at 577.8 points, or 0.41 percent lower.
Last week, China sharply devalued the yuan, which the government said was part of reforms meant to make its exchange rate more market-oriented. But the decision accentuated worries over the health of the world's second-largest economy following a slump in exports.
Two-way trade between Vietnam and China was $59 billion last year, in which Vietnam recorded a deficit of $29 billion.