PETALING JAYA: The US dollar continued to advance against major Asian currencies as another strong payroll report underpinned the growth of the world’s largest economy and raised expectations the Federal Reserve might raise the federal funds rate sooner than expected.
The greenback strengthened against a basket of Asian currencies including the ringgit, which closed at RM3.495 versus the US dollar and fell to as low as 3.507 in intraday trade. The ringgit last saw such levels at the height of the global financial crisis when funds sought safe-haven assets such as US Treasuries. Year-to-date the US dollar has strengthened 6.71% against the ringgit.
Other Asian currencies that lost ground against the US dollar included the Japanese yen, South Korean won, Indonesian rupiah and Taiwan dollar.
Malayan Banking Bhd’s Singapore-based forex research head Saktiandi Supaat, who expected the ringgit to end the year in the 3.45 to 3.55 band, said there could be further upside for the US dollar in the first half of next year and possibly into the third quarter. “We are reviewing it to take into consideration recent market developments,” he told StarBiz in an email.
Saktiandi said the Fed was expected to start raising rates in the third quarter of next year on the basis that US policymakers would be cautious about growth and measured in moving too early at the risk of disrupting recovery.
“The recent strong jobs data need to be seen more consistently over the next few months and global growth needs to recover more sustainably in our view. But the Federal Open Market Committee decision will be a domestic US economy story and a sustained strong labour market over the next three months or so could justify an earlier move,” Saktiandi said.
Falling oil revenue stemming from weak global crude oil prices has also been a source of concern for the ringgit’s performance. Economists believe that Malaysia may not be able to achieve its budget deficit target of 3% if Tapis crude, the benchmark which the Government uses to assess oil revenue, falls below US$65 a barrel. Global benchmark Brent was trading at US$67 while the US WTI benchmark had dropped below US$65 at press time.
Former Prime Minister Tun Dr Mahathir Mohamad wrote in his chedet.cc blog that the effect of falling oil prices should not be dismissed lightly. “Unless the Government cuts its spending, the deficit must become bigger. The claim that it will not increase the deficit needs to be explained,” he pointed out.
Dr Mahathir questioned if the federal budget will be affected by lower crude oil receipts and whether Petroliam Nasional Bhd will be able to maintain its financial contribution to the Government if it earned less from the sale of oil and gas products.
“The lower oil price must affect the servicing and payment of debts by the producer, which has to sell more in a weak market. Profits must go down, if not disappear completely. Taxes for the Government will consequently go down,” he explained.
He said when the Government reduced expenditure, a lot of businesses would suffer and that profits would go down and with it the taxes.
Meanwhile, Citigroup Inc economist Kit Wei Zheng said in a report that policymakers regarded Tapis crude spot price of US$65 to US$70 as the “neutral” oil price level for the Government to meet the 3% deficit target next year.
“In the event that Government expenditure cuts are needed to keep the fiscal deficit on target, policymakers would prioritise operating expenditure cuts over development expenditure cuts. One example of operating expenditure cuts is rationalising of social assistance schemes (that is, non-fuel subsidies),” he said after meeting Malaysian policymakers last week.
Kit said costs could also be further contained within the public service by controlling headcount increase or improving the procurement process.
On the weakened currency, analysts said the country’s mainly export reliant economy could actually be buoyed by it.
“Yes, there will be positive spillover benefits accrued to local exporters, namely those with trade denominated in the greenback,” Affin Hwang Capital economist Alan Tan said, noting that the ringgit’s weakness was due mainly to the dollar’s strength rather than local weakness.
“The ringgit could eventually also strengthen to RM3.45 as we move into 2015, given that the fall against the dollar was overdone. We also maintain that the country’s current account balance will still be in surplus position and fiscal deficit is forecast to be at 3.3% by the end of next year,” Tan added.
He noted in his report issued last week that Malaysia’s economic fundamentals, despite being shaken at present, would continue to remain sound moving forward.
The weakened ringgit could also benefit commodity companies that had sales in dollar terms.
“Oil and gas companies that derive their revenue in dollar terms may benefit from the weaker ringgit if their borrowings are lightly hedged or hedged in local currency terms. But if they hedge themselves in dollar borrowings, then the impact is negated,” UOB Kay Hian’s oil and gas analyst Danny Chan told StarBiz.