Vietnam has been forced to devalue its currency, the dong, for the third time since June 2008.
The country’s pegged exchange rate will shift to 17,961 dong per dollar vs. 17,034 previously. The Vietnamese central bank will also hiking interest rates to 8% from 7% in an attempt to control inflation.
Vietnam’s situation is the opposite of the undervalued pegged currency China is lucky to have. Defending an overvalued pegged currency, the dong, is tough business since it drains dollar reserves rather than builds them. According to the Wall Street Journal, Vietnam’s dollar reserves have fallen to $16.5 billion from $22 billion at the start of the year.
The dong has been under substantial pressure all year due to Vietnam’s rapidly expanding trade deficit, which hit $8.7 billion during the first 10 months of 2009. Inflation has also been picking up, hitting 4.35% in November.
Yet it appears that gold arbitrage may have been the straw that finally broke this currency’s back:
NYT: The immediate reason for the dong’s weakness, traders say, is that demand for dollars has risen because the spread between gold prices in Vietnam and in foreign markets has widened. Vietnam lifted an 18-month old ban on gold imports Nov. 12 in a bid to curb panic buying that had sent the dong plummeting.