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Dong stable after 1% devaluation: HSBC

Update: June, 21/2014 - 09:50

HA NOI (VNS)  — The latest 1 per cent devaluation of the Vietnamese dong should not lead to aggressive weakness in the currency, HSBC noted in its Global Research report released on Thursday.

The bank further pointed out that the dong should be relatively stable over the coming year. These comments were made in light of the State Bank of Viet Nam's move last Wednesday to weaken the reference rate for the currency to 21,246 per dollar from 21,036 per dollar in a bid to bolster the export-driven economy without cutting policy rates and to flatter inflationary pressure.

This is the first shift in the rate since June 28, 2013, when the currency was weakened by around 1 per cent versus the dollar after keeping the rate unchanged since December 2011dong has been better supported by the more balanced nature of forex inflows over the last year.

Excessive trade produced certain signals when it reached US$1.65 billion in May and $2 billion in April. Dong's onshore liquidity has been relatively flush with interbank interest rates softening, which together has led to an increased demand for the US dollar, given the narrower interest rate differentials.

"While we do not expect the latest small depreciation to cause much concern over the future of the dong, there is no doubt a risk that if the policy is seen as too loose, then concerns about rising inflation and further depreciation could arise," the report pointed out.

The inflation rate in Viet Nam was recorded at 4.72 per cent in May compared with the 4.45 per cent rate recorded in April.

Despite the rise in FX reserves, policymakers are clearly less willing to draw down on these reserves too soon, given that they have allowed the FX rate to adjust without embarking on any significant policy resistance measures.

HSBC also suspects there may be a risk of a further 1 per cent depreciation later in the year if policymakers feel it is necessary, though HSBC's base prediction is for a relatively stable dong in the coming months. — VNS

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