Purchases put pressure on exchange rate

Purchases put pressure on exchange rate

As the USD/VND exchange rate remains volatile under mounting pressures, all eyes are now on trade negotiation with the US, and State Bank of Vietnam’s next policy moves on balancing market stability.

The US State Treasury is purchasing foreign currency from commercial banks, Photo: Le Toan

Last week, the US State Treasury issued a notice on its plan to purchase foreign currency from commercial banks, with the proposed volume of up to $200 million, marking its second such move within a month. Year-to-date, it has held 10 tenders with a cumulative value of approximately $1.8 billion.

The Treasury’s move to buy foreign currency comes amid a persistently high USD/VND exchange rate in the domestic market.

Nguyen Quang Thuan, CEO of Fiin Ratings, stated that the USD/VND exchange rate remains elevated due to strong domestic demand for the greenback from both enterprises and the State Treasury, which further tightens supply.

“The Treasury’s large-scale foreign currency purchases are putting additional pressure on an already historically high exchange rate. In the coming period, the expected weakening of the USD may help ease exchange rate pressure. This would allow the State Bank of Vietnam to further expand the trading band, letting the market adjust itself instead of relying on direct foreign reserve interventions,” he added.

Thuan cited data noting that demand for USD in the domestic market surged as businesses ramped up imports of raw materials to fulfill orders within a 90-day timeframe and build up reserves ahead of the peak season. In the first five months of this year, Vietnam’s import turnover from the US increased by $7.2 million, pushing corporate demand for foreign currency sharply higher.

“This move aims to ease pressure from tariff-related risks, which could otherwise add further strain to the exchange rate. Meanwhile, the State Treasury continues to purchase USD to meet its external debt obligations, making USD supply on the market even more scarce,” said Thuan.

“We believe the room for further cuts to deposit and lending interest rates is narrowing, given the risk that the US may impose tariffs of around 20-30 per cent on Vietnamese exports. At the same time, the US Federal Reserve’s delay in cutting interest rates to deal with inflation may continue to exert upward pressure on the exchange rate,” he forecasted.

Since the beginning of June, the exchange rate has swung sharply, caught between mounting global geopolitical tensions and domestic monetary interventions.

A growth outlook released on June 9 by UOB Singapore forecasts that the VND’s weakness stems from Vietnam’s subdued economic prospects. The bank revised its 2025 GDP growth forecast down to 6 from 7.09 per cent, highlighting the risk of a potential return to the 46 per cent tariff level if trade talks with the US do not make meaningful progress.

The report also noted that the VND has been the worst-performing currency in the region since the April 30 holiday, even as most other Asian currencies rebounded strongly in Q2. The VND has depreciated by 1.8 per cent quarter-to-date, hitting a new low of around 26,000 VND/USD.

“These factors are expected to keep the VND under pressure in the near term. We anticipate the currency will remain near the weaker end of its trading band against the USD through Q3/2025. However, starting in Q4, the VND may begin to recover along with the broader rebound in regional currencies as trade-related uncertainties begin to ease,” stated UOB’s Global Markets and Economic Research team.

In its exchange rate report released last week, MB Securities similarly warned that the exchange rate will continue to face headwinds in the coming period, as the USD is expected to stay strong due to protectionist trade policies and high US interest rates. The Fed is projected to cut rates only twice this year.

“Secondly, the risk of retaliatory tariffs will be a major factor affecting the USD/VND exchange rate in 2025. If tariffs remain elevated, it will pose significant challenges for Vietnam’s export and foreign investment activities, tightening foreign currency supply and adding pressure to the exchange rate,” the report said.

VIR