Vietnam devalues its currency: a case study

We have a case study in currency devaluation:

“Vietnam devalued its currency by 5.4 per cent against the dollar on Wednesday and raised interest rates by a full percentage point in an effort to cut inflation and end weeks of damaging uncertainty which has seen ever increasing pressure on the currency. For weeks, the government had insisted that it would not give in to the pressure: “Vietnam will not devalue our currency,” Nguyen Minh Triet, president, told a seminar in Singapore last week. “We will take cautious steps on our monetary policy.””…

“The decision poses further challenges to the central bank’s credibility,” Tai Hui, a regional economist for Standard Chartered Bank, said in a research note. “The risk is that local investors will pay little attention to official comments going forward, which may exacerbate devaluation pressure on the currency.” The dong has come under intense pressure in recent weeks as inflation started climbing and domestic demand, driven by the country’s $8bn stimulus programme, drove the current account deficit to close to $2bn a month. The dong was trading on the grey market at 19,800 to the dollar on Tuesday but came back to 19,500 after the government move.”

Looks like Vietnam checked all the boxes:

-claim you won’t devalue

-swelling current account deficit

-go ahead and devalue because the govt doesn’t have the reserves to defend the peg

-loss of central bank credibility

http://www.econ.ucdavis.edu/faculty/cmm/os_growth.pdf

 

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1 Comment »

  1. I’m writing an article about this. This post is helpful. I’ll be sure to give credit where credit is due. Thank you.

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