Vietnam shares retreat in wake of rate hike, dong devaluation

VNStockNews.com - Vietnam's main share index was down nearly 5% in midmorning trade, as investors assessed the impact of the central bank's interest rate hike and currency devaluation.

Vietnam's central bank said Wednesday it would devalue the dong, the Vietnamese currency, by 5.4%, effective Thursday, and raise interest rates by one percentage point to 8%, effective Dec. 1.

The Vietnamese benchmark VNIindex retreated 4.8% to 479.43.

The devaluation was Vietnam's third such move since June 2008.

Calyon, Credit Agricole CIB's head of forex strategy Mitul Kotecha said he expects further devaluations by Hanoi in coming months.

"The 5% looks more like a compromise move, and I think there will be more depreciation," said Kotecha, adding the move reflects macro pressures on the nation's deteriorating trade position and a black market exchange rate that is well below the dong's official levels.

The dong has been under pressure in recent months because of the fiscal and current-account deficit, one of the few countries within the region faced facing a twin deficit problem.

The central bank reset the U.S. dollar/dong exchange rate to 17,961 from 17,034.

Backstreet dealers have been trading the dollar at between 19,600 dong and 19,800 dong, according to reports.

Kotecha said Vietnam's troubled currency was an isolated case within Asia and that contagion effects were unlikely.

"This is more isolated to Vietnamese issues, rather than Asian regional issues and for that reason it's very difficult for other countries to object too much," Kotecha said. (MarketWatch)