The State Bank of Vietnam said in a statement on its website that the U.S. dollar will buy 20,693 Vietnamese dong compared with the previous rate of 18,932 dong per dollar. The statement also said the bank has narrowed the band in which the dong can move from 3 percent to 1 percent.
Vietnam, one of the fastest-growing economies in Asia after China, has been struggling to keep its rapid expansion on a sustainable footing. Growth has averaged more than 7 percent annually over the past decade but last year the country's inflation rate hit 12 percent and the trade deficit stood at $12.4 billion.
Pham Chi Lan, a former government economic adviser, said the devaluation "is what needs to be done" even though it may hinder goals of curbing high inflation. A weaker dong would make imported goods more expensive, adding to price increases.
She said the authorities had held the dong at an artificially high level for too long, but warned other steps must be taken to overcome a growing trade deficit and high inflation.
"Curbing inflation depends on controlling state investment and the state-owned economic sector, which needs to improve efficiency," she said.
In December, Moody's Investor Services downgraded Vietnam's foreign currency bond rating to B1 from Ba3 and kept the outlook as negative, meaning it could cut the credit rating again.
The move came as the state-owned shipbuilding conglomerate Vinashin defaulted on its first repayment of principal due on a $600 million loan from a group of creditors led by Credit Suisse. The company nearly went bankrupt last year, drowning in $4.5 billion in debts, equivalent to 4.5 percent of the country's gross domestic product in 2009.
Friday's move was the fourth devaluation of the dong since November 2009. In the official market, the currency can now trade as weak as 20,900 dong per dollar, which is closer to the rates available in the widely used black market.
On Friday morning, the dollar was selling for 21,550 dong on the black market, up from 21,300 Thursday.