The Weakening Dollar: Why Are Exchange Rates Still Rising?

USD Weakens, VND/USD Exchange Rate Still Rises

As of May 21, 2025, the USD Index is trading around 99.7 points, down over 7% year-to-date; there was even a time when it fell to the 98-point mark (April 21) – the lowest in the last 2 years.

The main reason for the decline in the USD Index since the beginning of the year is the expectation that the Fed will cut interest rates after the US economy showed signs of weakening and inflation cooled. US GDP fell 0.3% in the first quarter of 2025 compared to the same period last year. This is also the first quarter since the first quarter of 2022 that the US GDP recorded negative growth.

In addition, exchange rates and the global foreign exchange market are currently greatly affected, multifaceted, and rapidly changing due to geopolitical and macroeconomic developments. In particular, the US administration’s trade tariff and protectionist policies, Fed moves, Russia-Ukraine tensions, Middle East warfare, and US-China relations have caused abnormal fluctuations in the US dollar, thereby putting pressure on emerging currencies, including the VND.

Asian currencies also benefited from the nearly 7% weakness of the USD Index since the beginning of the year, while regional currencies such as the Taiwan dollar (TWD) rose nearly 9%, the Ringgit (MYR) and Thai Baht (THB) rose nearly 5%. In particular, the strong decline of the US dollar compared to the TWD is due to many exporting enterprises simultaneously selling the USD hoarded from export revenue.

Compared to regional currencies such as THB, SGD, MYR, and PHP, the VND is still depreciating when the central exchange rate announced by the State Bank of Vietnam (SBV) on May 21, 2025, was 24,962 VND/USD, up 2.5% compared to the beginning of the year.

Mr. Nguyen Quang Huy – CEO of Finance and Banking, Nguyen Trai University – assessed that the increase in the USD/VND exchange rate is due to internal factors from foreign currency supply and demand and the impact of US trade tariff policies. The demand for foreign currency for import and export payments increased sharply in the first 4 months of the year when import activities recovered faster than exports, creating pressure on foreign currency demand. Along with that, the psychology of hoarding foreign currencies and gold by a part of businesses and investors due to concerns about exchange rate and inflation risks has further tightened foreign currency liquidity in the short term, pushing up the exchange rate.

In addition, the SBV’s policy is to keep the VND interest rate low to support economic recovery, thereby reducing the attractiveness of the VND compared to the USD in the context of high USD interest rates.

Another factor is that Vietnam has close trade relations with China. When China devalues the CNY to support exports, if the VND remains stable, Vietnamese goods will become less competitive, forcing the SBV to adjust the exchange rate flexibly.

In general, despite the weakness of the USD globally, the pressure on the USD/VND exchange rate comes from the confluence of global instability, domestic management policies, the shift in market expectations, and the structural factors of the economy, and indirect foreign investment capital tends to withdraw to international markets with higher interest rates.

In a report released on May 12, UOB Bank said that the recent strong recovery of Asian currencies is somewhat excessive, but compared to previous forecasts, it has adjusted down the peak levels expected for USD/Asia exchange rates in the third quarter of 2025, reflecting the possibility that the most tense phase of the trade war has passed. Accordingly, UOB forecasts that USD/CNY will be at 7.32 in Q3/2025; USD/SGD, USD/MYR, USD/THB, USD/IDR, and USD/VND will be at 1.32, 4.38, 33.5, 16,800, and 26,300, respectively.

Flexible Exchange Rate Awaiting 90 Days of Negotiation

Mr. Huy also assessed that the increase in the exchange rate during the 90-day monitoring and negotiation period of trade tariff policies with the US will have a dual impact – both positive and potentially risky.

The short-term benefit for exports when the VND weakens makes Vietnamese goods cheaper in nominal value, improving competitiveness, especially in industries with low-profit margins such as textiles, seafood, and consumer electronics.

Many Vietnamese exporting enterprises import 60-70% of raw materials in foreign currencies. When the exchange rate increases, input costs increase, eroding the benefits of the exchange rate. Therefore, only enterprises with a high level of localization or with a risk management strategy will see their profit margins increase.

A rapid increase in the exchange rate may cause many small businesses to delay plans to borrow in foreign currencies or increase their USD reserves. Export enterprises affected by exchange rate fluctuations will find it difficult to plan prices or make long-term financial plans.

Therefore, if Vietnam reaches a positive trade agreement with the US and is not put on the currency manipulation watchlist, the exchange rate situation is likely to be stable with adjustments and will not increase suddenly.

In that case, the SBV will tend to maintain exchange rate stability to consolidate its management credibility and create a foundation for macro stability. However, a strong appreciation of the VND is not expected due to internal pressure from the balance of payments, interest rate differentials, and the trend of regional currencies still slightly depreciating.

However, the Fed’s interest rate decision remains a key variable for the exchange rate. If the Fed officially cuts interest rates in the third or fourth quarter of 2025, the pressure on global exchange rates will ease, and the VND is expected to remain stable around the range of 25,200-25,600 VND/USD.

On the contrary, if the Fed delays cutting interest rates or the US economy grows stronger than expected, the USD may rebound and put pressure on the VND/USD exchange rate.

In the coming time, the SBV will continue to manage the exchange rate flexibly but firmly, in order to respond to international fluctuations while still maintaining a stable management orientation, especially when aiming at controlling inflation and stabilizing the macro-economy.

Cat Lam

– 08:00 21/05/2025

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