PETALING JAYA: The ringgit’s near-term trajectory will be influenced by the higher for longer US interest rate policy, with the gap between US and domestic interest rates expected to widen further through another expected hike in the benchmark federal funds rate by the US Federal Reserve (Fed) this year.
The ringgit opened weaker against the greenback in early trade yesterday, following a 25-basis point (bps) hike in the federal funds rate to between 3.75% and 4%.
Most analysts expect a further 25 bps hike this year given the hawkish tone set by Fed chairman Kevin Warsh.
A stronger than expected US economy underpinned the unanimous vote to raise the federal funds rate.
The Fed also revised the gross domestic product (GDP) growth forecast for 2026 to 2.3% from 2.2% while growth for 2027 was revised to 2.4% from 2.3%.
Its preferred inflation gauge, the personal consumption expenditures index, was raised to 3.7% from 3.6%.
Oversea-Chinese Banking Corp Ltd foreign-exchange strategist Christopher Wong told StarBiz that while the US dollar-ringgit trade gapped higher at yesterday’s open, this partly reflected a catch-up given the Malaysia Day holiday the previous day.
It was also partly reflective of the firmer US dollar and higher US Treasury yields following the Fed meeting.
“While the Fed’s 25-bps hike was largely anticipated, the higher rate projections and Warsh’s continued focus on inflation reinforced the concerns of a higher-for-longer US rates story, lifting the US dollar and front-end US Treasury yields,” he said, adding that for the ringgit, the immediate pressure remains largely external.
Wong noted in the near term, the ringgit would remain sensitive to whether the US dollar and US rates repricing extend following the Fed’s meeting.
“Further upside in front-end US Treasury yields could still keep the US dollar-ringgit supported, while a stabilisation in US rates should allow some of the holiday catch-up move to fade,” he said.
“Beyond the near term, Malaysia’s relatively sound macro backdrop should continue to provide some cushion against broader US dollar strength.
“We still project the US dollar to ringgit to end 2026 around 4.02 levels, premised on a a non-aggressive Fed tightening cycle and oil prices to stabilise,” Wong said.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expects the ringgit to stay volatile in the near term, given expectations of more rate hikes.
“The restrictive monetary policy stance means that the US dollar would stay positive, as the rate differential between the federal funds rate and overnight policy rate (OPR) will favour the US rate,” he said.
Most analysts expect the OPR to be unchanged at 2.75% throughout 2027, which widens the gap with US rates.
Mohd Afzanizam added that this would weigh on the domestic bond market in the near term given the correlation between Malaysian government bonds and US treasuries, as investors hunting for yield would buy shorter-tenor US treasuries, as this tracks interest rates.
Given the federal funds rate median projection at 4.1% by year-end, this would make US yields more attractive, at least for short-duration bonds.
“Hence, most traders and investors would be mindful of the duration risk, and chances are, the preference would be for short duration in order to minimise the interest rate risk,” Mohd Afzanizam said.
