The State Bank of Viet Nam weakened the Vietnamese dong by 1 per cent, raising the US$-VND daily reference rate from VND21,246 to VND21,458.

After the State Bank's decision to increase the inter-bank average exchange rate by 1 per cent on January 7, numerous banks increased the US dollar exchange rate.

However, given the strength of the US dollar against most emerging market ( EM) currencies in early 2015 and with the US dollar-Vietnamese dong having been closing in on the topside of the bank for the past few weeks, the move does not come as a complete surprise.

HSBC experts said further Vietnamese dong weakness would only be moderate, as underlying fundamentals had not deteriorated. They expected another 1 per cent depreciation later this year, pushing the rate to VND21,750 per dollar.

The experts said US$-VND had been trading closer to the top side of the band through the course of December in line with the much stronger US dollar seen over the last few months. This shift in the reference rate should be seen as something of a catch up with other emerging market currencies. Indeed, a 1 per cent fall in Vietnamese dong versus the US dollar actually represented a continued outperformance versus most other Asian currencies since the start of the first quarter, they said.

There was no significant fundamental deterioration in recent weeks which led the SBV to depreciate the Vietnamese dong. Although the trade balance flipped to US$900 million deficit over the month, causing an annual $2 billion surplus, FDI flow was robust, registering around $2.3 billion in December and $15.6 billion over 2014 as a whole.

Furthermore, inflation continued to decrease in Viet Nam, pushing real interest rates into positive territory. Interbank Vietnamese dong rates have been broadly rising since October, suggesting that Vietnamese dong liquidity is not excessively loose.

In response to the State Bank's decision, selling prices ranged from VND21,420-VND21,450 and purchasing prices were set at VND21,510-VND21,520 per US dollar at commercial banks including Vietcombank, Vietinbank, Eximbank and Techcombank.

This is the first time this year the State Bank has adjusted the exchange rate, a move that aims to bring the market in line with the international and domestic financial market climate and stabilise the foreign exchange market. The central bank plans to implement measures and policy instruments to stabilise the exchange rate and foreign currency market on the new rate platform.

During a conference on banking sector responsibility in 2015, Governor of the State Bank Nguyen Van Binh stressed that one of the sector's targets this year was maintaining the stability of the foreign exchange market and keeping rate fluctuation below 2 per cent, though he added this would not be easy.

VNS