A clerk counts U.S. dollar banknotes. Photo courtesy of Thanh Nien (Young People) newspaper.

The U.S. dollar index (DXY) continued to weaken in August, sliding to 97.7 points by the end of the month - a 1.4% decline from early August and 10.6% drop year-to-date - driven by growing expectations of a rate cut from the U.S. Federal Reserve and heightened political tensions in the U.S.

Despite the dollar's broader weakness, the USD/VND exchange rate continued to climb in August. MBS attributed this to rising domestic demand for foreign currency, as businesses ramped up imports of raw materials ahead of the year-end production cycle.

In addition, the trend of USD hoarding amid the SBV’s ongoing accommodative monetary policy further added pressure.

In response, the SBV, the country's central bank, sold roughly $1.5 billion via cancelable 180-day forwards at an exchange rate of VND26,550 per USD, targeting credit institutions with negative foreign currency positions.

"This move is seen as a flexible approach, helping stabilize market sentiment while preserving foreign exchange reserves in the event that banks choose to cancel contracts if FX pressure later eases," MBS noted in the report issued on September 10.

The intervention initially calmed the market, but the Vietnamese dong soon weakened again. By the end of August, the interbank rate stood at VND26,345 per USD (up 3.5% year-to-date), while the free market rate rose to VND26,685 per USD (up 3.6%).

In contrast, the reference rate edged down slightly by 0.04% to VND25,240 per USD, up 3.7% compared to the beginning of the year.

While the U.S. Federal Reserve (Fed) is widely expected to cut interest rates this year, MBS pointed out four domestic factors likely to sustain pressure on the dong.

First, the VND-USD interest rate differential remains wide, even with a Fed cut to 4%. Second, import demand is rising due to zero tariffs on U.S. goods, while exports have slowed, narrowing the trade surplus.

Third, FDI inflows are cooling, with investors awaiting clearer tax policy. Fourth, the gold price gap between domestic and international markets remains significant.

“We forecast the average USD/VND exchange rate to range between VND26,600-26,750 in 2025, marking a 4.5-5% increase from the start of the year,” MBS projected.

Deposit rates may decline further despite interbank volatility

On the interest rate front, MBS noted that after the SBV resumed net liquidity withdrawals in late July, overnight interbank rates spiked to a five-week high of 6.4% on August 7, but quickly reversed course.

During August, the SBV injected over VND361 trillion ($13.68 billion) through open market operations (OMO) at 4% interest, with tenors ranging from seven to 91 days. Meanwhile, maturities reached VND386.1 trillion, resulting in a net withdrawal of over VND25.2 trillion.

Despite this, the overnight rate dropped to a two-month low of 1.6% by August 28, indicating ample system liquidity. The rate later rebounded to 3.8% by month-end, driven by increased liquidity needs ahead of Vietnam’s National Day holiday (September 1-2). Rates for one-week to one-month tenors ranged between 4.2–5.2%.

In contrast to interbank volatility, retail deposit rates remained stable. As of late August, 12-month term deposit rates at private banks stood at 4.89% (down 16 basis points year-to-date), while state-owned banks held steady at 4.7%.

Credit growth continued its strong momentum, with total outstanding loans rising 11.8% since the end of 2024 and 20.6% year-on-year as of August 29.

MBS attributed the stable deposit rates to abundant liquidity, following major capital injections from the SBV in June and July. This liquidity has enabled banks to maintain low funding costs, in line with government directives to support economic growth.

However, deposit rates may face upward pressure toward year-end as credit demand remains robust, especially after the SBV recently lifted credit growth quotas for certain banks to ensure sufficient capital supply to the economy.

Still, MBS noted that the central bank in July continued urging lenders to lower deposit rates and adopt coordinated efforts to maintain monetary stability and create room for further lending rate cuts.

“Assuming the Fed cuts rates by 50 basis points in H2/2025, narrowing the VND-USD rate gap, the SBV will have greater room to maintain a low interest rate environment,” MBS said.

MBS forecast that the 12-month deposit rate at private banks could edge down slightly by 2 basis points, ending 2025 at 4.7%.

Pham Thanh Ha, SBV Deputy Governor, on September 6 stated that credit had increased by 11.8% against the end of 2024.

"Lending recorded positive growth compared to the previous years. In the year to end-August, outstanding credit in the whole economy reached VND17,460 trillion ($661.36 billion), up 11.8% against end-2024," he told a government press meeting.

He said since the beginning of the year, foreign currency liquidity had been ensured, fully meeting the legitimate needs of the economy.

As of end-August, the USD had appreciated by about 3.4% against the Vietnamese dong (VND) compared to the end of last year.