Vietnam Dong Weakens on Speculation Rate Cut May Fuel Inflation

Vietnam’s dong weakened on speculation last week’s cut in borrowing costs could fuel inflation and reduce investor confidence.

The State Bank of Vietnam dropped its benchmark interest rate by one percentage point on July 4, even after year-on-year inflation reached 20.8 percent in June, the highest among 17 Asian economies tracked by Bloomberg.

“We see a heightened risk of domestic capital flight,” Christian de Guzman, a Singapore-based assistant vice president at Moody’s Investors Service, wrote in a research note released today. “This will further unhinge inflation expectations and renew downward pressure on the currency.”

The dong weakened 0.1 percent to 20,590 per dollar as of 4:04 p.m. in Hanoi, according to prices from banks compiled by Bloomberg. The State Bank of Vietnam set its reference rate at 20,608 today, compared with 20,613 on every day last week, according to its website. The currency is allowed to fluctuate by as much as 1 percent on either side of that rate.

Government bonds rose, with the yield on the benchmark five-year notes declining one basis point, or 0.01 percentage point, to 12.43 percent, according to a daily fixing from banks compiled by Bloomberg.

--Nguyen Dieu Tu Uyen. Editors: Andrew Janes, James Regan

To contact reporter on this story: Nguyen Dieu Tu Uyen in Hanoi at +84-4-936-6727 or uyen1@bloomberg.net