A bank employee (right) counts Vietnamese dong banknotes at a bank in Vinh Yen city, Vietnam, on Wednesday. (Reuters photo)
A bank employee (right) counts Vietnamese dong banknotes at a bank in Vinh Yen city, Vietnam, on Wednesday. (Reuters photo)

Vietnam’s move to devalue its currency and increase exchange rate flexibility was hailed as a “welcome development” by the International Money Fund (IMF) Thursday.

The State Bank of Vietnam (SBV) on Wednesday moved the midpoint of the dong’s exchange rate to the dollar down by 1%, and widened the trading band by 1 percentage point in either direction, to a total of 3% either way. The move was a response to the devaluation of the yuan by Beijing and an anticipated interest-rate hike by the US Federal Reserve, the SBV said. It was the third time the SBV has devalued the dong this year, which has seen a total depreciation of 5% against the dollar.

The shift was expected to promote exports, after China’s move sparked fears of a “currency war.” A weaker currency makes exports more competitive overseas. Two weeks ago Vietnam expanded the dong’s trading band by 1% either side of the fixed midpoint. On Aug 11, China’s central bank let the yuan drop by 1.9%, the largest shift in two decades. Vietnam’s response “will help the authorities achieve their broader goal of maintaining overall macroeconomic and inflation stability,” said Jonathan Dunn, the IMF representative for Vietnam.