Protein translocation and folding in the endoplasmic reticulum of Saccharomyces cerevisiae involves two distinct Hsp70 chaperones, Lhs1p and Kar2p. Both proteins have the characteristic domain structure of the Hsp70 family consisting of a conserved N-terminal nucleotide binding domain and a C-terminal substrate binding domain. Kar2p is a canonical Hsp70 whose substrate binding activity is regulated by cochaperones that promote either ATP hydrolysis or nucleotide exchange. Lhs1p is a member of the Grp170/Lhs1p subfamily of Hsp70s and was previously shown to function as a nucleotide exchange factor (NEF) for Kar2p. Here we show that in addition to this NEF activity, Lhs1p can function as a holdase that prevents protein aggregation in vitro. Analysis of the nucleotide requirement of these functions demonstrates that nucleotide binding to Lhs1p stimulates the interaction with Kar2p and is essential for NEF activity. In contrast, Lhs1p holdase activity is nucleotide-independent and unaffected by mutations that interfere with ATP binding and NEF activity. In vivo, these mutants show severe protein translocation defects and are unable to support growth despite the presence of a second Kar2p-specific NEF, Sil1p. Thus, Lhs1p-dependent nucleotide exchange activity is vital for ER protein biogenesis in vivo.