Stability or flexibility? (Bloomberg)

It isn’t quite clear which of those two goals Vietnam’s central bank is pursuing with respect to its currency, which some analysts say is ripe for a crisis.

The concern is that an overvalued exchange rate, coupled with a trade deficit and an intolerable surge in inflation may spook foreign investors to pull their money out of Vietnam, and in this they may be joined by locals.

On June 26, the central bank announced it would double—to 2 percent—the limit it imposes on the daily change in the tightly controlled official rate for trading Vietnamese dongs into U.S. dollars and vice versa.

That does sound like a small move toward greater flexibility in what’s essentially a currency pegged to the U.S. dollar.

Besides allowing for a controlled release of devaluation pressures, an orderly decline in the currency may also help narrow the trade deficit, which almost tripled from a year earlier to about $ 15 billion in the first half of 2008.

Seeking export competitiveness through a cheaper currency isn’t much of a policy option for Vietnam at present. Exports aren’t even a big concern. The trade gap is wide because Vietnam is importing too much.

Too sharp a depreciation in the dong could, by pushing up the local price of imported goods, stoke inflation, which is already very high. Consumer prices rose about 27 percent from a year earlier in June. (The General Statistics Office in Hanoi usually announces data before the month has ended.)

And that might help explain why the central bank decided to ban trading in dong using currencies other than the dollar. The move seems to signal a preference for exchange-rate stability.

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