PETALING JAYA: All eyes are on the ringgit’s outlook as key officials of the United States’ Federal Reserve (Fed) convene to decide on the interest rates for the first time this year.
The market is anticipating a smaller rate hike by the US Federal Open Market Committee (FOMC), and in such event, it may further ease the US dollar and fuel the ringgit’s upward momentum seen since November last year.
The ringgit had strengthened against the US dollar by over 10% since November 2022, from RM4.71 to slightly over RM4.24 yesterday.
Apart from the ringgit, other regional currencies such as Singapore dollar, Indonesian rupiah and Thai baht have also strengthened significantly against the greenback over the past several months.
Regardless of the huge attention on the US interest rate direction, economist Geoffrey Williams said it will only have a temporary effect on the ringgit and that it should be ignored.
The economics professor at Malaysia University of Science and Technology (MUST) also described the hype over the US interest rates as a “source of noise”.
On the ringgit’s appreciation since late last year, Williams said it should not be considered as an uptrend but instead a normalisation around the long-term trend since 2015.
“This would put the exchange rate against the US dollar to about RM4.20 to RM4.30. Barring any significant shocks, this is the range to look out for during 2023,” he told StarBiz.
UOB Group market strategist Quek Ser Leang foresees the ringgit’s appreciation against the greenback to continue.
“Further US dollar-ringgit weakness is not ruled out but in view of the deeply oversold conditions, any decline is unlikely to break the support at RM4.20.
“The US dollar-ringgit rate dropped to a fresh 9.5-month low of RM4.22 last week before closing lower by 0.98%,” said Quek.
Over the long term, MUST’s Williams said factors that would support the ringgit include stable economic growth around the normal trend, lower and more stable inflation as well as a stable investment outlook.
In addition, external factors would also affect the ringgit.
“In the short term, exchange rates are driven by market sentiment and capital flows – this is why policy cannot be used to influence exchange rates systematically.
“Inflation has peaked everywhere, so interest rate rises are not necessary and in any event, higher interest rates in the United States will not bring down inflation that is already falling.
“The Fed should pause rates now,” he added.
The US dollar has been losing steam since late September 2022. The US Dollar Index, which measures the greenback against a basket of currencies, has slipped from its 2022 peak of 114.19 in September last year to 101.93 yesterday.
Socio-Economic Research Centre executive director Lee Heng Guie said the US interest-rate differential play, which has been underpinning the US Dollar Index’s rally in 2022, has started to lose traction in late 2022 and continued into early 2023.
He said the ringgit is benefitting from the descending US dollar index, as markets anticipate the Fed will back off from its current path of increasing interest rates due to cooling US inflation.
The optimism surrounding China’s reopening, which is supportive of the yuan’s strength, also helped to drive positive sentiment in the ringgit.
Lee said one of the factors that will influence the direction of the ringgit is the interest rate differential between Malaysia and the United States, which is likely to be narrower given a near-ending Fed rate-tightening cycle.
This is premised on the assumption that domestic interest rates will continue to normalise at a measured pace to rebuild sufficient monetary buffer.
Domestic policies, economic growth and inflation prospects would also influence the ringgit’s outlook.
This is premised on the global economic prospects, as a sharp slowdown will have a dampening impact on emerging economies via both trade and financial channels.
“In addition, the government’s fiscal deficit and debt level, exports and trade balance performance as well as the accumulation of foreign reserves would affect the ringgit.
“This year’s exports are expected to slow due to weak global demand and lower commodity prices.
“Overall, we expect the ringgit to trade between RM4.25 and RM4.30 per US dollar by end-2023,” said Lee.
Centre for Market Education chief executive officer Carmelo Ferlito believes that a more moderate monetary policy will benefit the US dollar the most, giving a signal that the Fed is trying to avoid contractionary pressures.
“I think the very aggressive monetary policy of the Fed may had worried investors about a recession and that’s why the US dollar is losing track in recent months,” he said.
Commenting on the ringgit, Ferlito concurred that the local note will be affected by international factors, including the policy direction in the United States.
“But the choices at home in terms of economic policy, monetary policy and, of course, political stability will play a role too.
“Making long-term predictions in unstable scenarios is just like guessing.
“It depends on the monetary and fiscal policies of both sides, the worldwide scenario, how hard the economic downturn will hit and where it will hit more,” he said.