diff --git a/osh/word_eval.py b/osh/word_eval.py
index 87cf09bc7a..68f82b9412 100644
--- a/osh/word_eval.py
+++ b/osh/word_eval.py
@@ -997,7 +997,7 @@ def _EvalBracedVarSub(self, part, part_vals, quoted):
                 # avoid it.
                 rhs_str = _DecayPartValuesToString(effect_part_vals,
                                                    self.splitter.GetJoinChar())
-                state.SetLocalString(self.mem, var_name, rhs_str)
+                state.SetStringDynamic(self.mem, var_name, rhs_str)
               return  # EARLY RETURN, part_vals mutated
 
             elif effect == effect_e.Error:
diff --git a/spec/var-op-test.test.sh b/spec/var-op-test.test.sh
index e5bb8c9a10..d2ac4e4076 100644
--- a/spec/var-op-test.test.sh
+++ b/spec/var-op-test.test.sh
@@ -106,3 +106,17 @@ echo should not get here
 v=foo
 echo ${v+v is not unset} ${unset:+is not unset}
 ## stdout: v is not unset
+
+#### ${var=x} dynamic scope
+f() { : "${hello:=x}"; echo $hello; }
+f
+echo hello=$hello
+
+f() { hello=x; }
+f
+echo hello=$hello
+## STDOUT:
+x
+hello=x
+hello=x
+## END