KUALA LUMPUR: The Malaysian ringgit will see renewed pressure following the US Federal Reserve's guidance of slower pace of rate cuts ahead.
On Dec 18, 2024 the U.S. central bank cut interest rates by 25 basis points, but Federal Reserve Chair Jerome Powell said more reductions in borrowing costs hinge on further progress in lowering stubbornly high inflation.
His remarks showed policymakers are starting to reckon with the prospects for sweeping economic changes under a Donald Trump administration.
Economists believe this move, combined with ongoing global uncertainties, could lead to further depreciation of the ringgit and increased market volatility.
UCSI University Malaysia Associate Professor of Finance Dr Liew Chee Yoong said the Fed's signaling of fewer cuts suggests tighter monetary policy than previously expected.
Liew said this could strengthen the US dollar as global investors anticipate higher relative returns in the US, making the ringgit less attractive.
"A stronger US dollar and potential yield differentials might prompt capital outflows from emerging markets, including Malaysia. Investors could redirect funds to US assets, pressuring the ringgit further.
"Additionally, the announcement will also heighten uncertainty in emerging economies like Malaysia, leading to speculative currency movements," he told the Business Times.
Echoing the statement, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit, along with other regional currencies, faced significant pressure following the Federal Open Market Committee's (FOMC) projections for the coming year.
Throughout 2024, the ringgit performed well up to the third quarter, with the USDMYR exchange rate reaching RM4.1235 on September 30, reflecting an 11.4 per cent gain since the start of the year.
However, as of now, the ringgit has depreciated by 8.4 per cent against the US dollar since September 30, 2024.
Despite this, Afzanizam said inflation expectations in the US, while remaining elevated, did not spike alarmingly after the FOMC meeting.
"This suggests that the Fed effectively communicated that its current monetary policy stance remains restrictive, helping to mitigate the risk of runaway inflation.
"The Fed's ability to maintain its credibility in managing inflation is critical, as it prevents nominal bond yields from rising excessively. This, in turn, helps keep borrowing costs manageable in credit markets, supporting economic stability.
"The exchange rate is expected to stabilise around RM4.5000 (previously estimated at RM4.4000) as the year comes to a close," he said.
Meanwhile, SPI Asset Management managing partner Stephen Innes highlighted that the rise in US bond yields and the dollar rally have weighed on the ringgit.
Despite the dollar index (DXY) climbing by 1.2 per cent, Innes said the ringgit has only weakened by 0.75 per cent, which could be seen as a sign of confidence in Malaysia's still-positive economic outlook.
He noted that while Malaysia's economic outlook remains positive, the current volatility is likely a short-term market reaction.
"The outlook for the ringgit remains bearish in the short term, especially if US economic growth remains strong and inflation persists," said Innes.
He added that widening interest rate gaps between the US and Malaysia, along with potential tariffs on China, could further strain the ringgit.
"Consequently, I anticipate that local exporters will start hoarding US dollars again, exerting further downward pressure on the ringgit, particularly if there's a broad increase in local demand for the dollar.
"This complex interplay of global economic factors and local currency dynamics underscores a challenging period ahead for the ringgit in the foreign exchange markets," he said.
Additionally, Economist Dr Geoffrey Williams said the Federal Reserve decisions have already been priced into the ringgit market.
He said the exchange rate has varied from around RM4.80 to RM4.12 this year and is currently around RM4.50.
"This volatility is undesirable but is a response to global factors."
"Policymakers have intervened to repatriate profits from GLICs and Malaysian companies and this helped first stop the depreciation and then strengthen the ringgit but systematic impact is difficult. "The long-term value of the ringgit depends on fundamentals," Geoffrey added. Ends