KUALA LUMPUR: The ringgit has not been in a good position so far this year but the Silicon Valley Bank (SVB) collapse and an expected dovish US Federal Reserve may strengthen the local currency, economists said.
hey expect the US dollar to lose its strength in the next few months as the Fed will likely pause its interest rate hikes, and cut rates by November this year ahead of the US elections next year.
As the greenback gained strength in the past year, the ringgit only lost 6.5 per cent, outperforming even the global majors such as Japanese yen and Australian dollar, which were devalued by 15 per cent and 7.7 per cent respectively.
However, things started to turn sour in February with the ringgit being the worst- performing currency among major Asian currencies.
The ringgit seemed to be traded more favourably since Monday, economists said.
At 5pm, the local note closed lower to 4.4800/4950 versus the US dollar compared with last Monday's closing rate of 4.4925/4965.
SPI Asset Management managing director Stephen Innes said the ringgit continued to trade more favourably this week on expectations of a possible pause in the Fed rate hike cycle with some even thinking a cut was warranted due to contagion risk from the SVB collapse.
Innes said global investors were still cautious ahead of tonight's US consumer price index and possible global financial problems that could create more abrupt demand for safe haven dollars.
"But a rates pause seems like the logical outcome as the Fed needs to keep markets more flush with cash to foster improved financial conditions and provide them with some time to digest the domestic contagion risk.
"So, for the time being, the ringgit is trading better on the back of the lower US yields," he told the New Straits Times.
Bank Muamalat Malaysia Bhd head of economics and market analysis Mohd Afzanizam Abdul Rashid said the SVB debacle seemed to suggest that the Fed might need to revisit its monetary tightening strategy.
At the current juncture, Afzanizam said the neutral rate for the US Fed Fund Rate (FFR) was at 2.50 per cent. Therefore, the prevailing FFR of 4.75 per cent was highly restrictive.
"This would mean the operating environment for business has become more challenging as they need to contend with higher borrowing costs.
"Perhaps, the upcoming Federal Open Market Committee meeting on March 21-22 would see them become more dovish in their stand. Such thinking has resulted in weaker US dollar and by extension, stronger ringgit.
"However, for the ringgit versus euro, our currency has depreciated to 4.7940. This happened because of the anticipation of a 50 basis point-hike in the European Central Bank's Governing Council meeting on March 16," he said.
Juwai IQI chief economist Shan Saeed said the markets were under pressure due to the collapse of SVB.
Shan said banking stocks would get hammering as investors shifted their focus to energy and healthcare stocks.
"This puts downward movement of the US dollar leading to other currencies to appreciate against the greenback," he said.
Shan said the ringgit was following the market dynamics which determined the fair market exchange rate at 4.48 now.
"We expect the dollar to lose its strength in the next three to four months as the Fed would pause in raising rates and cutting rates by October to November this year as elections are coming in November 2024," he said.
Malaysia University of Science and Technology economist Dr Geoffrey Williams said the ringgit was actually quite stable and resilient given the volatile international environment.
"It is trading in expected ranges. There is nothing the government can or should do to interfere except to maintain stability in monetary and fiscal policy," said Williams.
Meanwhile, Putra Business School economic analyst Associate Professor Dr Ahmed Razman Abdul Latiff said the ringgit was heavily influenced by the movement of US dollars and not much affected by other factors such as SVB and overnight policy rate decisions by Bank Negara Malaysia.
However, Ahmed Razman said if SVB had caused the US dollar to weaken, the ringgit would be indirectly affected.
"But the direct impact of these factors towards the ringgit is minimal compared to the direct impact on the US dollar movement.
"To cope with this weakening ringgit, the government can continue to encourage domestic production which hopefully will reduce dependency on imports, as well as exploring new markets and opportunities for exports of local products and services," he added.
© New Straits Times Press (M) Bhd
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