Vietnam devalues its currency by 1 percent in response to devaluation of Chinese yuan

Vietnam allowed its currency to weaken by 1 percent Wednesday following the devaluation of the Chinese yuan and with an eye to a possible U.S interest rate hike.

The central bank-set reference rate weakened to 21,890 dong to the U.S. dollar and the trading band at which the dong could be traded above or below was widened to 3 percent from 2 percent, the State Bank of Vietnam said in a statement.

"Following the strong devaluation of the Chinese yuan, domestic market sentiment is very much concerned with the negative impact of the United States Federal Reserve's interest rate increase," the statement said.

It said the central bank was widening the trading band — effectively allowing the dong to weaken more — "in order to proactively lead the market and pre-empt negative impacts of the possibility of the Fed rate increase."

Last week, China devalued the yuan by nearly 4.7 percent, which the government said was part of reforms meant to make its exchange rate more market-oriented. But the decision accentuated worries over the health of the world's second-largest economy following a slump in exports.

Two-way trade between Vietnam and China was $59 billion last year in which Vietnam recorded a deficit of $29 billion.