Vietnam's Stable Dong Becomes Policy Anchor Amid Global Rate Pressures

While Vietnam’s exchange rate has demonstrated notable stability against mounting external pressures, this resilience is evolving into a crucial policy anchor that could limit the country's monetary flexibility.

According to MB Securities (MBS), the interbank USD/VND exchange rate closed May at VND26,313, an increase of just 0.16% since the start of the year. The central exchange rate was largely unchanged, while the free-market rate fell by approximately 1.9% over the same period. Throughout May, the interbank rate was contained within a narrow band of VND26,309-26,368 per USD, a level of stability that contrasts with previous periods of market volatility.

Domestic Rates Provide a Counterbalance

Tran Thi Khanh Hien, Head of Research at MBS, observed that Vietnam’s external position has weakened, with the nation posting a trade deficit of nearly $14 billion in the first five months of the year.

“This is a significant figure for an economy that has become accustomed to trade surpluses in recent years," she noted. "At the same time, global oil prices have continued to fluctuate within the $90-100 per barrel range amid prolonged tensions in the Middle East, meaning inflationary pressures have not fully disappeared. In the US, both core personal consumption expenditures and consumer price index have reaccelerated in recent months, reinforcing market expectations that the higher-for-longer interest-rate environment will persist.”

Hien explained that the combination of a growing trade deficit, high oil prices, and sustained high global interest rates would typically exert significant pressure on the currency. The reason it has not, she argued, lies in Vietnam’s domestic money market.

“Market data show that the average 12-month deposit rate across the banking system currently stands at approximately 8.35 per cent per annum, up 257 basis points from the beginning of the year," she said.

Deposit rates have stayed high despite repeated calls from the State Bank of Vietnam (SBV) for lower lending rates. Interbank rates have also remained elevated; overnight rates fluctuated between 5-6% for most of May before climbing to around 7% near month-end, and even surpassed 10% at times in early June.

A Complex Liquidity Picture

Saigon-Hanoi Securities (SHS) offered a similar view, noting the spot exchange rate held within the VND26,310-26,360 per USD range in May, avoiding the sharp volatility seen in the first quarter. This stability has occurred despite persistent adverse factors.

SHS reported that the SBV engaged in continuous net liquidity withdrawals via open market operations for the first three weeks of May, which reduced outstanding liquidity from a range of $12.3-12.7 billion to below $11.2 billion. The central bank then reversed course, re-injecting funds in the final week.

“In the last week of May alone, the SBV injected more than $1.18 billion on a net basis to ease liquidity pressures," SHS stated in a report. "More notably, unusual market developments on June 1 caused overnight interbank rates to surge above 10 per cent. This occurred despite the fact that State Treasury deposits at the four state-owned commercial banks remained exceptionally large.”

As of May 22, SHS estimated State Treasury deposits at state-owned banks amounted to approximately $28.9 billion. Concurrently, public investment disbursement had only reached about 18% of the annual target.

“This suggests that the current liquidity story is not simply one of excess or insufficient liquidity. A substantial amount of capital remains parked within the banking system in the form of treasury deposits, while the transmission of funds into the real economy has been slower than expected,” the report said.

SHS concluded, “As a result, policymakers are not only tasked with injecting liquidity but also with maintaining a delicate balance between exchange-rate stability, inflation control, and economic growth. From this perspective, exchange-rate stability is no longer a natural outcome but the result of continuous policy calibration across multiple objectives.”

Global Rate Environment Shifts

Where discussions on the exchange rate over the past two years focused heavily on the timing of US Federal Reserve interest rate cuts, the current environment has grown far more complex.

According to Hien, financial markets have largely priced out the possibility of Fed rate cuts this year.

“FedWatch data indicate a growing probability that the Fed will maintain current rates for an extended period, while some market participants have even begun considering the possibility of further rate hikes in 2027 should inflation remain persistent,” she said. “This represents a significant shift from the prevailing expectations just a few quarters ago, when many investors believed that a global monetary easing cycle was imminent. More importantly, however, the pressure no longer originates solely from the US.”

Analysts at Viet Dragon Securities (VDSC) pointed to simultaneous policy shifts across other major financial hubs.

“In Japan, monetary policy normalisation continues. After years of ultra-low interest rates, the Bank of Japan is gradually unwinding extraordinary support measures. Japanese government bond yields have risen significantly from previous levels, reflecting expectations of a new interest-rate environment," they said. "In Europe, inflation concerns are likewise forcing the European Central Bank to adopt a more cautious stance towards rate cuts.”

VDSC analysts argue the global narrative is moving away from the return of cheap money and toward a higher-for-longer interest rate scenario, a shift with significant implications for Vietnam.

“During 2023-2024, exchange-rate pressures were driven primarily by USD strength. Today, however, pressure may increasingly stem from the global interest-rate environment itself," VDSC stated. "When yields in the US, Japan, and Europe remain elevated simultaneously, international investors have more attractive alternatives. This compels emerging markets to maintain the relative attractiveness of their local currencies if they wish to limit pressure on exchange rates and capital flows.”

This creates a difficult balancing act. On one hand, the economy needs reasonably low interest rates to support businesses, stimulate investment, and sustain growth. On the other, cutting rates too aggressively could narrow the yield differential between the Vietnamese dong and the US dollar, intensifying pressure on the foreign exchange market. Policymakers are no longer simply choosing between growth and inflation; they must now manage the intricate interplay of growth, interest rates, and exchange-rate stability simultaneously.