The State Bank of Vietnam (SBV) yesterday set its average interbank rate at 18,544 dong to the US dollar, compared with 17,941 the previous day.

The bank said the decision was taken to balance supply and demand, and increase flows in the foreign exchange market "while contributing to controlling the trade deficit and stabilising the macroeconomy".

Vietnam's trade deficit reached $12.2 billion last year.

The central bank maintained the 3% daily trading band for buying and selling US dollars by commercial banks.

Because the band remains unchanged, there was no official devaluation, a banker said, but in practice the new interbank rate means the dong loses value, "so we can say it's a devaluation".

In its order yesterday, the SBV also capped the interest rates for corporate dollar savings accounts at 1%, less than what lenders had been offering.

Devaluation, coupled with lower interest rates, aims to encourage businesses to sell dollars to banks, said the banker, who declined to be named.

"This (interbank) rate might be maintained in the next few months in order for the state to control the trade deficit," she said.

Singapore-based DBS Group Research said yesterday's move should not be seen as a surprise and was likely to be followed by more devaluation during the year.

"Under the circumstances, we remain comfortable with our end-2010 target of 19,640 [dong per US dollar]," DBS said.

The latest devaluation came during a period of high demand for cash before a week-long Lunar New Year holiday known as Tet.

In the Thai market, the baht was relatively stable, trading at 33.15/18 to the US dollar against 33.13/18 on Wednesday. The baht has appreciated by 2.5% against the dollar over the past six months, in line with regional currencies. Over the past month, the baht has weakened slightly, as investors have moved out of emerging markets and risky assets over concern about the global economic recovery.

Bandid Nijathaworn, a deputy governor of the Bank of Thailand, said the devaluation of the dong would not necessarily lead to an advantage for Vietnamese exporters considering the country's higher inflation rate.

Consumer prices in Vietnam rose 7.62% year-on-year in January, compared with a 4.1% increase in Thailand's consumer price index.

Pornsilp Patcharintanakul, deputy secretary-general of the Thai Chamber of Commerce, said Thai agricultural exports, particularly rice and seafood, would be most affected by the dong devaluation.

Thai exports are also facing more competitive pressure from other countries with relatively cheaper currencies, including China, India, Indonesia and Malaysia.

"[Thailand's] export competitiveness has eroded as the baht has strengthened even as the Chinese yuan is pegged [to the dollar]," Mr Pornsilp said.

"The gap widened last year. The baht appreciated by 4% [to the dollar] last year, while the dong weakened by 5%."

But Mr Pornsilp said he understood that the Bank of Thailand had only a limited capacity to intervene in the currency markets.

"The central bank has a burden to mop up liquidity from its foreign exchange transactions to help stem inflation. We hope the central bank is doing its best," he said.

Thailand's foreign reserves stood at $142.4 billion at the end of last month, compared with $111 billion at the end of 2008. Reserves have risen steadily as a result of central bank measures to ease baht appreciation due to trade surpluses and capital inflows.

Thanavath Phonvichai, director of the Economic and Business Forecasting Centre of the University of the Thai Chamber of Commerce (UTCC), said the dong devaluation would inevitably affect Thai exporters in a number of product categories.

He said the devaluation was not unexpected, given Vietnam's fundamental economic troubles.

According to the UTCC, low-priced goods would be most heavily affected, especially Thai rice, fishery products, garments and shoes.

Thailand's exports to China, the US, Japan, and the EU, the markets where Vietnam also have significant market shares, would feel the pinch from the lower dong, the study says.