Vietnam’s central bank will gradually widen the band in which the country’s currency is allowed to trade against the U.S. dollar, Pham Huu Phuong, head of the central bank’s representative office in Ho Chi Minh City, told a state run newspaper on Thursday. The dong is presently allowed to trade against the dollar within a three-percent band around a midpoint rate set daily by the central bank.

Vietnam’s exchange rate has experienced a turbulent past few months, due primarily to the global rise of the dollar since the onset of the financial crisis, as nervous investors pulled money out of emerging markets like Vietnam. The dong had been rising against the dollar early in the year due to large inflows of foreign investment. It then dropped sharply in late spring on fears of a currency crisis due to rampant inflation. It stabilized in the third quarter as inflation fell, before sliding again in the past two weeks.

The dollar rose sharply against the dong on Wednesday on the country’s black market, as bankers cited fears that the government’s economic forecast for 2009 was too optimistic. The government estimates that the economy will grow by as much as 6.5% in 2009. But an IMF report last week forecasted growth of just 5%. Additionally, a report by Vietnam’s Bank for Investment and Development released this week concluded that the country would likely show a trade deficit of about $7 billion next year, which would lead the dong to fall 3.5 to 5% against the dollar.

The government set its reference rate Wednesday at 16,600 dong to the dollar for those selling dollars. However, commercial banks were selling dollars for 16,986 dong each, while gold shops and black market traders were offering 17,430 dong to the dollar.

“People think that Vietnam’s exports next year will shrink, so the supply of foreign currency will decrease, leading to a lack of dollars,” said Nguyen Duc Vinh, chief executive of Techcombank, the fourth-largest commercial bank in Vietnam.