Inflation Leads Vietnam to Devalue its Dong

Battling higher inflation and hemorrhaging foreign-exchange reserves, which fell to $16.5 billion from $22 billion over the course of 2009, Vietnam has resorted to devaluing its currency, the dong.

According to the Wall Street Journal:

“The State Bank of Vietnam said Wednesday it will raise the tightly controlled U.S. dollar/dong exchange rate by 5.44% Thursday, setting the dollar at 17,961 dong, up from 17,034 dong Wednesday.

“The central bank will also raise its benchmark interest rate to 8% from 7% from December.

“This marks the third time in two years that Vietnam has devalued its currency. It follows news that inflation picked up sharply to 4.35% in November from 2.99% in October and comes as the country’s trade deficit has widened sharply.”

The dong has been under pressure partly because of Vietnam’s trade deficit, which may exceed $10 billion this year. Excessive trade deficits? Too-low interest rates? It sounds eerily familiar to the story in the US.

Read more details in the Wall Street Journal’s coverage of Vietnam devaluing its currency and raising interest rates.

The Daily Reckoning