The decision reflects a delicate balancing act: managing mounting external pressures without undermining investor confidence or macroeconomic stability.
Exchange Rate Under Strain Amid Global Headwinds
Between January and 24 July 2025, the Vietnamese đồng (VND) depreciated by over 3% against the US dollar and nearly 18% against the euro. The depreciation comes in the context of the State Bank of Vietnam’s (SBV) commitment to maintaining low interest rates and expanding credit—by 10% in the first half—to support domestic growth. The results were encouraging: GDP grew by 7.52% year-on-year, while core inflation was contained at 3.24%.
Nevertheless, Vietnam’s currency remains under significant strain due to broader global forces. Chief among them is the US Federal Reserve’s continued hawkish stance—having held off on interest rate cuts since December 2024—which has fuelled a persistent strengthening of the dollar. Additional pressure emerged in April when the Biden administration announced a sweeping 10% baseline tariff on imports from most countries, including Vietnam, alongside retaliatory measures targeting a range of trade partners.
These developments left the SBV with little choice but to shift towards a more flexible exchange rate regime. Rather than tightening liquidity to stabilise the currency, authorities opted to stay the course with monetary easing, supplemented by direct market interventions via foreign currency sales. The approach marks a strategic pivot, prioritising growth and competitiveness over short-term exchange rate rigidity.
Allowing the đồng to weaken modestly is not without purpose. The controlled depreciation serves as a mechanism to support exports and sustain short-term competitiveness, while creating headroom for long-term structural growth. The government has set an ambitious GDP growth target of 8.3–8.5% for 2025, seeking to lay the groundwork for double-digit expansion in the years ahead. This assertive posture also signals to international investors that Vietnam remains open for business.
Capital inflows reflect this optimism. In the first half of the year, Vietnam attracted more than $21.5 billion in foreign direct investment (FDI), up 32.6% year-on-year. FDI growth has in turn fuelled export expansion and helped increase foreign currency reserves—an important buffer against exchange rate volatility.
Remittances, another vital source of hard currency, also saw a significant boost. Ho Chi Minh City alone received $5.23 billion in remittances during the first six months of 2025, a 20% increase over the previous year and nearly 1.73 times higher than the city’s realised FDI. If this trend continues, total nationwide remittances could reach $18–20 billion this year, compared to $16 billion in 2024.
These flows are helping to mitigate the immediate pressure on the exchange rate, but policymakers remain acutely aware that external risks are far from over.
A Highly Open Economy Faces Structural Vulnerabilities
Vietnam’s deep integration into global markets brings with it both opportunity and risk. More than 70% of the country’s export value stems from the FDI sector, which tends to benefit when the local currency weakens—exports become more competitive abroad, boosting revenues for foreign-invested firms.
In contrast, domestic enterprises, particularly small and medium-sized firms, often find themselves squeezed. Heavily reliant on imported raw materials and components, they face rising input costs when the đồng depreciates. At the same time, intense competition from imports and FDI players makes it difficult to pass these costs on to consumers, eroding profit margins and threatening long-term viability.
The challenge is compounded by the looming implementation of US retaliatory tariffs and tighter enforcement of origin tracing regulations. Exporters—especially those in the FDI sector—must now demonstrate clear, verifiable proof of product origin to avoid punitive duties. In this environment, exchange rate policy cannot operate in isolation; it must be part of a broader, coordinated response encompassing trade regulation, production cost management, and long-term competitiveness.
One of the structural weaknesses in Vietnam’s economic toolkit is its relatively modest level of foreign exchange reserves. While inflows from FDI and remittances provide a cushion, they are not a panacea. Limited reserves restrict the SBV’s ability to intervene aggressively in currency markets, increasing exposure to external shocks and market speculation.
This makes the need for a careful, coordinated policy response all the more urgent. Exchange rate management must strike a fine balance: agile enough to respond to external pressures, yet disciplined enough to avoid fuelling inflation or unsettling market expectations.
Crucially, the exchange rate must be seen not as an end in itself, but as a policy instrument in service of broader economic objectives. Overly rigid exchange rate policies risk creating artificial stability that can ultimately backfire—disrupting trade flows and increasing financial stress. Conversely, uncontrolled depreciation could dent investor confidence and unsettle domestic markets.
Towards a More Coherent Policy Framework
To navigate this complex landscape, Vietnam’s exchange rate strategy must rest on three fundamental pillars.
First, the exchange rate should be clearly positioned as a tool for economic development—not a fixed anchor. Policymakers must resist the temptation to overcorrect. Striking the right balance between nominal stability and competitive depreciation is key to sustaining both external trade and domestic confidence.
Second, exchange rate policy must be implemented with a high degree of flexibility, proactiveness, and inter-agency coordination. In today’s volatile global environment, piecemeal responses will not suffice. Vietnam must develop institutional agility to adapt rapidly to external shocks while preserving internal coherence.
Third, monetary, fiscal, and trade policies must work in concert. The SBV needs to maintain a flexible monetary stance to support liquidity and stabilise the currency without triggering inflation. Fiscal authorities should avoid deficit spending that adds pressure to interest rates or currency values. Meanwhile, trade policymakers must accelerate market diversification, enforce stricter rules of origin, and capitalise on the country’s network of free trade agreements to mitigate the impact of external restrictions.
Vietnam’s decision to allow the đồng to depreciate moderately while expanding credit represents a pragmatic, forward-looking approach to economic management. In doing so, the country acknowledges the realities of a shifting global landscape—and the limits of rigid policy frameworks.
