The State Bank of Vietnam (SBV) on Wednesday allowed the Vietnamese dong to be traded more flexibly within a widened trading band in response to China’s depreciation of its currency, the Chinese yuan.

China, Vietnam's top trading partner, devalued the yuan by nearly two percent on Tuesday.

The SBV, which is Vietnam’s central bank, gave the green light for the trading band for interbank dollar/dong transactions to move from one percent to two percent to ensure the competitiveness of Vietnamese goods, it said Wednesday on its website.

With the recent move of the central bank, dollar/dong transactions can fluctuate within a band of plus or minus two percent around the midpoint, which the SBV sets daily.

The mid-point has been held at 21,673 dong per dollar since May 7, when the SBV devalued the local currency by one percent for the second time this year, aiming to spur exports and curb demand for imports that has left it with a hefty trade deficit, Reuters said.

The new trading band allows a range from VND21,240 to VND22,106 to the greenback.

Almost all local financial institutions immediately adopted the latest trading band and quoted ask prices of the U.S. dollar at over VND22,040-22,100.

It is the first extension of the trading band in four years, after the central bank decided to scale it down by two percentage points from plus-or-minus three percent on February 11, 2011.

Also on that day, the central bank devalued the dong by a record rate of 9.3 percent, bringing the interbank rate of the greenback from VND18,932 to VND20,693 per dollar.

According to the SBV, the Wednesday move resulted mainly from Beijing's decision to devalue the Chinese yuan by 1.9 percent against the U.S. dollar yesterday, the strongest adjustment in two decades, leading to the devaluation of a series of key currencies in Asia against the greenback.

The devaluation will have an adverse impact on Vietnam's economy as China is the Southeast Asian country's leading trade partner, the central bank said.

So the SBV has taken the decision to loosen the trading band to make the exchange rate between the dong and the greenback more flexible, the central bank further explained.

Vietnam ran a US$16.7 billion trade deficit with China in the first half of this year.

Earlier, the central bank’s governor vowed to maintain foreign exchange rate fluctuations so that the dong will not be devalued by over two percent against the greenback by the end of this year, given the resources the SBV has in its foreign exchange reserves.

Late last month, Governor Nguyen Van Binh said Vietnam’s foreign exchange reserves stood at $37 billion then, plus 10 metric tons of gold and other kinds of valuable papers.

If gold, valuable papers and deposits in foreign currencies by the State Treasury and other credit institutions at the central bank are included, the total value is worth up to $40 billion, Binh told Thoi Bao Kinh Te Sai Gon (The Saigon Times) newspaper on July 28.

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