Vietnamese dong likely to depreciate 3% in 2025: VinaCapital

The Vietnamese dong is likely to depreciate 3% in 2025 on anticipation that the US Dollar/DXY Index will finish 2025 nearly unchanged, says Michael Kokalari, chief economist at Vietnam's leading fund manager VinaCapital.

In a report named "Looking ahead at 2025" released on Friday, Kokalari said he predicted 2025 is "another volatile year" for the Vietnamese dong.

"We expect 2025 will see some fluctuations for the Vietnamese dong, but the USD-VND exchange rate will ultimately end next year with a manageable 3% depreciation against the US dollar," he wrote.

2025 is likely to be "a very volatile year" for the US dollar, partly because US inflation is always going to rebound in early 2025 for a variety of reasons, irrespective of who won the presidential election, according to Kokalari.

"The market is pricing in two more Fed rate cuts next year, but we would not be surprised if the Fed does not cut rates at all next year, which would push the USD higher," he wrote

Furthermore, about two-thirds of the tariffs that the US imposes on other countries ultimately get reflected in a higher value of the US dollar. That implies the US dollar will continue to appreciate if Trump follows through with his plans to impose tariffs on Canada/Mexico/China.

But incoming Treasury Secretary Scott Bessent and others also guided that the Trump administration intends to use tariffs as a negotiation tool to push down the value of the US dollar via a so-called “Plaza Accord 2.0” international agreement, Kokalari noted.

He noted two Vietnam-specific factors will impact the dong in 2025.

First, Vietnam’s foreign exchange (FX) reserves are currently below three months’ worth of imports. Central banks generally hold a minimum of three months of FX reserves (insufficient FX reserves would inhibit the State Bank of Vietnam or SBV from selling US dollars to defend the dong, for example).

The Vietnamese appreciated versus the USD in the lead-up to the Fed’s September rate cut. However, the USD-VND exchange rate appreciated by less than its Asean EM peers from July to September due to the SBV’s insufficient FX reserves.

Second, Vietnam’s about 6%/GDP trade surplus is set to shrink. FDI factories depleted their inventories of production inputs over the last two years. That depletion boosted Vietnam’s trade surplus (about 6%/GDP in both years) because the vast majority of those production inputs are imported and then used to produce products that are exported.

"FDI firms are now importing more inputs to re-stock their inventories, so Vietnam’s import growth is now outpacing export growth (circa 16% import growth vs 14% export growth). We expect that differential to widen next year, which would shrink Vietnam’s trade surplus," Kokalari wrote.

The USD-VND exchange rate has been very volatile over last three years, primarily because the Fed initiated one of its rapidest-ever rate hiking cycles starting from early-2022, and then began cutting rates in September 2024, although Vietnam-specific dynamics also affected the dong.

The SBV cut interest rates in Vietnam during the first half of 2023 as the US Fed was hiking rates, which resulted in a record-high gap between short-term VND and USD interest rates (VND rates were more than 500 bps below USD rates at that time), putting enormous depreciation pressures on the dong in H2/2023.

The VND had depreciated by nearly 5% in the year to the end of May, driven by a near 4% increase in the US Dollar/DXY Index (owing to “sticky” US inflation and waning Fed rate cut expectations) and driven by political concerns in Vietnam.

The SBV responded to VND depreciation by tightening monetary policy and selling around $6 billion of its foreign exchange reserves, reportedly reducing the SBV’s total reserves to around $87 billion, which is less than three months’ worth of imports.

In recent months, the USD-VND exchange rate has “whipsawed” by appreciating in anticipation of the Fed’s September 2024 rate cut, but then depreciating in the anticipation of Donald Trump’s election (the DXY Index surged about 7% in the lead-up and immediate aftermath of the US presidential election because tariffs push up the value of the US Dollar), Kokalari added.

Standard Chartered in a report released on December 12 forecasts Fed rate cuts, which should lead to a softer-USD bias over the next few quarters, will result in the exchange rate of USD/VND at 25,250 by the end of 2024 and 25,450 by Q2/2025.

Tthe bank predicts the USD may face a period of weakness early in 2025 due to continued Fed rate cuts and uncertainty about policy implementation. But it is anticipated to strengthen in H2/2025 as fiscal and tariff measures under Trump 2.0 are clarified and implemented.

"Recent Fed rate cuts were expected to support Asian currencies, including the VND. However, stronger-than-anticipated US economic data has led to a less supportive environment for Asian FX markets. Trade policy uncertainties and inflation-inducing measures under Trump could further complicate currency stability in the region," it noted.

The State Bank of Vietnam set the daily reference exchange rate for the US dollar at 24,324 VND/USD on Friday, up 20 VND from the previous day.

With the current trading band of +/- 5%, the ceiling rate applicable for commercial banks during the day is 25,540 VND/USD and the floor rate 23,108 VND/USD.

The VND has depreciated by around 4.1% against the USD since the beginning of the year to mid December, nearing the peak of 4.6% seen in May, according to MB Securities (MBS).