KUALA LUMPUR, May 26 — A strong US dollar will likely continue in the near future and economies need to brace for another round of rough currency market as heightened risks would lead to a flight to safety phenomenon globally.
Last year, the aggressive interest rate hike by the US Federal Reserve (Fed) was the main factor in the weakening of the currencies market, including the ringgit, as the US dollar is seen to be giving better returns from the interest rate differential point of view.
During this crucial and volatile period, Bank Negara Malaysia (BNM) has done a commendable job of managing risks from external shocks and dealing with a strong greenback.
But now, an unexpected US government debt limit has induced another volatility in the markets, with the ringgit and Asian currencies not being spared from its adverse effects.
Responding to queries by Bernama, BNM shares pertinent points and insights into the ringgit amid its recent developments.
Ongoing developments in global financial markets have weighed down on market sentiment. These include the US debt ceiling impasse and episodes of stress in the US and European banking sectors. This has led to an increase in demand for safe-haven assets such as the US dollar and outflows from most emerging market economies as investors seek to protect their investments. Against this backdrop, the US dollar has strengthened against most currencies.
Consequently, the ringgit, like most currencies, has faced heightened depreciation pressures. The recent depreciation of the ringgit is therefore not limited to Malaysia alone. It is important to consider the overall performance of the ringgit in relation to not only the US dollar but also the currencies of our significant trading partners. The movement of the ringgit against our major trade partners, as measured by the nominal effective exchange rate (NEER), has been relatively more muted.
In the current environment, external developments are having a more dominant impact on the ringgit’s performance. Given this, the ringgit’s performance against the US dollar, or any particular currency, is not a reflection of the state of the economy.
Malaysia’s economy is expected to continue expanding within the range of four to five per cent in 2023. Domestic demand will continue to drive growth, supported by the continued recovery in the labour market and the realisation of approved multi-year investment and capital projects, including approved foreign direct investments, such as the East Coast Rail Link (ECRL), LRT Shah Alam Line or LRT 3, and Pan Borneo Highway. At the same time, Malaysia’s diversified export markets and product segments will continue to support the resiliency of the external sector.
The movements in the ringgit would continue to be market-determined and BNM will continue to manage the risks arising from heightened financial market volatility. To this end, BNM’s market operations will ensure sufficient liquidity and the orderly functioning of financial markets. The ringgit’s performance should improve as uncertainties from global market developments subside. This in turn will better reflect Malaysia’s sound economic fundamentals.