The International Monetary Fund, which in December called for a further tightening of monetary policy to "restore orderly conditions in the foreign-exchange market" and contain inflation, said today that it welcomed the attempt to narrow the gap between the official and parallel market exchange rates.

Still, Vietnam also needs "a broader set of policies to restore macroeconomic stability," said Benedict Bingham, the IMF's senior resident representative in Vietnam. "Monetary policy will need to focus more decisively on containing inflation, and fiscal policy will need to be put on a clearer consolidation path to contain public debt."

The monetary authority had already devalued the dong in November 2009 and February and August last year, amid concern the nation will run short on foreign capital needed to fund a trade deficit, which reached $1 billion in January, according to preliminary government figures.

While the official exchange rate of the currency had been little changed since the August 2010 devaluation, on the black market the currency weakened from about 19,500.

"We paid 20,500 per dollar in December and 20,800 in January," said Alan Young, chief operating officer of Australian-listed Vietnam Industrial Investments Ltd., which runs steel plants in the northern port city of Haiphong. "You just can't buy dollars at the official rate."

Currency reserves probably fell to about $13.6 billion at the end of last year, down from $14.1 billion in September and $23.9 billion in 2008, according to Citigroup Inc.

Eoin Treacy's view The Dong has been a headwind to investor interest over the last couple of years, but the odds are improving that this managed devaluation is nearing an end. This five-year chart indicates the 200-day MA has been a reasonably reliable trend smoothing device. A sustained move below it would be required to confirm a trend change.

Vietnam remains a frontier market and shares a number of common characteristics with other such opportunities. They are capable of incredible advances when they become fashionable as investment destinations. However, when investor interest moves elsewhere they are just as capable of giving up their entire advances. They often spend a prolonged period in base formation development; lying dormant until the next wave of speculative investor interest causes them to break upwards.

Today's large devaluation will have shaken confidence in the short term. Looking somewhat longer term, this move will help to improve competitiveness. Vietnam remains a recovery candidate.