AS emerging market currencies strengthen against the US dollar, many wonder if this weakness in the dollar can be sustained.
Against concerns of currency strength, all eyes are on how the central banks of countries like Australia and Thailand, will deal with this as it affects the competitiveness of their economies.
The Aussie dollar has spiked about 28% since its low in March; the strong baht only fell as its finance minister resigned less than half a month of assuming the post.
The US presidential election adds an element of uncertainty as to whether dollar weakness may be sustained.
Previously, dollar strength had partly stemmed from uncertainty and unpredictability associated with the present administration.
With a new administration (should one emerge), there could be more certainty; the dollar may be less of a safe haven.
With the continuing impact of Covid-19, and huge funding needs of the US economy, dollar weakness is seen to possibly sustain.
The dollar index has declined to its two-year low at end-August, falling by about 10% from its recent peak in March, while the ringgit has strengthened by about 7% since its weakest level in March.
“The Fed’s willingness to allow inflation to run moderately above the 2% target for a certain period of time, reinforces its stance of wanting to leave rates relatively low for a considerable period of time, ’’ said Malaysian Rating Corp associate director, economic research, Nor Zahidi Alias.
This was unlike previously when it raised rates pre-emptively as inflation climbed towards 2%.
In terms of the stimulus deadlock, US legislators have failed to agree on new fiscal measures to support the economy.
The greenback may rebound if Covid-19 cases start to taper off and the US economy gains momentum, while the performance of the ringgit would depend on, among other factors, crude oil prices and economy recovery in the second half, said Zahidi.
US unemployment rate fell to 8.4% in August, against almost 15% in April; in February, it was 3.5%.
Manufacturing activity rose to a near two-year high in August, to 56.0, said the Institute for Supply Management, but spending had shifted from equipment for the service industries to purchases of goods like home electronics.
US consumer confidence in August fell to the lowest since 2014, with the Conference Board Index at 84.8; high unemployment and uncertainty over future stimulus weighed on confidence.
With continued dollar weakness, the ringgit is expected to reach 4.08 against the dollar in the first half of 2021, said Hong Leong Bank managing director, global markets, Hor Kwok Wai.
Foreign interest in Malaysia’s bond market should continue for a few more months; it remains to be seen whether this can offset the large financing requirements of the government,
“The ringgit can strengthen to around 4.00 to the dollar if equity flows return, ’’ said Hor.
The uptrend in emerging market currencies is expected to continue as US rates remain low and the global economy recovers, spurred by huge monetary stimulus from global central banks and potential good news on the vaccine.
The weak dollar helps to reduce the cost of importation of machinery for ports and power plants, said MMC group managing director Datuk Seri Che Khalib Mohamad Noh.
For international trade, the weak dollar will push up the cost for foreign parties doing business with Malaysian companies that transact in ringgit.
With continued dollar weakness, exporters of palm and crude oil may report lower income in ringgit terms.
Products from the electrical and electronics, and semiconductor sectors may become more expensive, and face lower demand from a weaker and more inward-looking US economy.
If China’s economy continues to recover, the situation will improve as China is a major importer.
China is said to allow its currency to strengthen to make imports cheaper and boost domestic demand; this would not pose a threat to currencies of export-oriented economies.
Without Fed intervention, the US economy can weaken further due to Covid-19, and drag down the dollar.
However, the situation may trigger some major economies, especially net exporters to the US, to review their currencies to stay competitive, said Affin Islamic Bank CEO Nazlee Khalifah.
Looking at longer term trends, dollar weakness may be sustained for an extended period of time; the mounting US fiscal deficit needs to be funded, and unlimited amounts of bond purchases by the US Federal Reserve could surge.
These huge funding needs will lead to super low rates, causing a deficit in social security assets over liabilities.
Such a crisis, which may happen in ten years’ time, will require colossal amounts of bailouts and potentially sap the financial credibility of the US.
It may even necessitate a new international financial architecture that is less dependent on the dollar.
With their emerging wealth, countries with huge populations like China, India and other parts of Asia, may overtake the share of consumption from the US, said Areca Capital CEO Danny Wong.
That could trigger reduced holdings of the dollar, which is now the reserve currency of the world.
Yap Leng Kuen is former editor of StarBiz. The views expressed here are the writer’s own.