* Official dong rate at lower end of band after devaluation
* Unofficial rates remain outside the trading band
* NDFs point to further decline
* Analysts say more devaluation possible (Adds details, context)
By John Ruwitch
HANOI, Nov 26 (Reuters) - The official exchange rate of Vietnam's dong dropped to the lower end of its trading band on Thursday and unofficial rates continued to trade outside the limits, suggesting a devaluation had done little to restore faith in the currency.
Analysts said that the reaction showed markets still reckoned the dong was overvalued and they expected continued downward pressure and possibly further devaluations after the central bank devalued the currency by more than 5 percent on Wednesday.
"I just don't think the devaluation was enough to really sort this out," said Robert Prior-Wandesforde, an Senior Asian Economist at HSBC in Singapore.
Official quotes showed the dong at the weak end of the band, around 18,500 dong per dollar, although sources said actual interbank deals -- conducted via third currencies and by other means -- remained beyond the weak end of the band.
On the black market, the dong traded 19,300/19,500 in Hanoi, slightly firmer compared with around 19,700/19,900 per dollar before news of the measures on Wednesday but still well outside the official band, gold shop foreign exchange dealers said.
With dwindling currency reserves, rising inflation and a widening trade deficit, economists think it is unlikely the policies announced on Wednesday alone would get much traction over the longer term.
Offshore non-deliverable forwards were pricing in a continued fall of the currency, too, although they had also strengthened somewhat on the devaluation.
The head of a currency trading team at a foreign bank in Vietnam said faith in the band would not be restored by the measures, but that was not necessarily the central bank's aim.
"They do care, but if the ceiling rate is 18,500 and the parallel market is somewhere around 19,000 I think that they would be fine," said the trader who declined to be identified.
"If the government tries hard to intervene and protect the currency and make it within the band they can only achieve it in the short run. This is a major step by I do believe there is further adjustment needed."
EXPECTATIONS
The central bank adjusted the mid-point reference rate downward by more than 5 percent to 17,961 on Thursday, while at the same time narrowing the trading band to +/- 3 percent on either side of the mid point from +/- 5 percent.
State Bank of Vietnam Governor Nguyen Van Giau said the bank would ask some state-owned companies to sell foreign exchange to the central bank to ease a dollar shortage in the market. Businesses held about $10.3 billion in foreign currencies at banks, Thursday's Thanh Nien newspaper quoted Giau as saying.
Thursday's dong strengthening on unofficial markets was a result of dollar selling in anticipation of increased supply from the central bank, said one bank trader.
Prakriti Sofat, regional economist at Barclays Capital in Singapore, said the central bank's action "needs to be followed up with credible and strong intervention to quell expectations of further weakening in the currency".
That could be tough, given that foreign exchange reserves were at $16.5 billion as of August, down from $23 billion at the end of last year, according to a World Bank report.
"If the government tries hard to intervene and protect the currency and make it within the band they can only achieve it in the short run. This is a major step but I do believe there is further adjustment needed," said the head of the trading team, who declined to be identified.
On Wednesday the central bank also said it would raise interest rates by 1 percentage point effective Dec. 1. Inflation hit 4.35 percent in November compared with the same month last year, government statistics showed on Wednesday.
Meanwhile, Vietnamese stocks continued to take a beating in the wake of the news. The benchmark Vietnam Index in Ho Chi Minh City ended the session down 4.13 percent and the Hanoi index off 5.87 percent. (Editing by Kazunori Takada) ((john.ruwitch@thomsonreuters.com; +84 4 3825 9623; Reuters Messaging: john.ruwitch.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))