More upside likely for the ringgit
For months, the ringgit has been stuck in the “RM4.40-range trap” against the US dollar, with no clear recovery in sight.
However, the currency is finally exiting the trap, all thanks to US president Donald Trump’s tariff bazooka and his latest verbal assault on Federal Reserve (Fed) chair Jerome Powell.
In fact, over the past two days, the ringgit closed at around the RM4.37 to RM4.38 range. Over the coming weeks, the local note is forecast to rise further against the dollar.
Analysts, however, cautioned the upward momentum may not last too long and a reversal could be seen by year-end.
Heavily under pressure, the greenback is now at its weakest point in three years after Trump threatened to sack the nation’s central bank chief.
While this has spooked global investors, pushing them away from American securities like stocks and bonds to safe haven gold, the escalating tension between Trump and Powell offers the ringgit a likely short-term boost.
The ringgit could strengthen further to between RM4.20 and RM4.30 in the near term, said Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.
Year-to-date, the ringgit has appreciated against the greenback by 1.9%.
However, the upward momentum may not last too long, with Lee expecting the ringgit to end 2025 at between RM4.35 and RM4.45 against the greenback.
OCBC senior Asean economist Lavanya Venkateswaran also foresees the dollar to continue trending lower over the medium term.
In the near term, a steady yuan and the weaker dollar could help anchor currencies of Asian emerging markets, albeit in a differentiated manner.
“We expect the baht, ringgit and Philippine peso to do better. For the year-end, we have maintained our US dollar-ringgit forecast of 4.44, with a dip to 4.42 in the third quarter of 2024,” Lavanya told StarBiz.
The Dollar Index (DXY), which is a barometer of the greenback’s strength, was hovering below the 100-point mark at 98.44 as at press time yesterday. In comparison, the year-to-date peak was 109.96.
A value below 100 signifies a weakening dollar. The current DXY level is the weakest since March 2022.
Contrary to OCBC’s Lavanya and SERC’s Lee, CGS International Research’s head of economics Nazmi Idrus opined that near-term volatility, including higher tariffs imposed on Malaysia or talks of a recession in the United States, could favour the US dollar more versus the ringgit.
“We have actually revised up our ringgit expectation from RM4.25 to RM4.35 against the dollar.”
Nazmi explained that Trump wants an effective devaluation of the dollar to encourage investments and the return of the manufacturing sector.
“There are certainly ways of doing so, one of them is ensuring that the Fed maintains a dovish stance with expectations of a few cuts this year.
“This will certainly be a case for stronger appreciation of the ringgit ahead. However, at the current pace of the trade war, we could see signs of an economic downturn.
“We have seen consumer sentiment dropping sharply. In a weak economy, the US dollar could be seen as a safe haven, contributing to its strength.
“If economic contraction is stronger than expected, the ringgit may see a weakening. However, over a longer term, Fed rate cuts and a narrowing interest rate differential (US versus Malaysia) could be positive for the ringgit,” he said.
At the moment, SERC’s Lee pointed out that there are many “moving parts at play” to exert downward pressure on the DXY, giving a lift to the ringgit in the near term.
Investors have trimmed their holdings of dollar assets on concerns about the tariff policy uncertainty and its devastating impact on the US economy.
“On the ringgit, domestic factors such as gross domestic product (GDP) growth, investment prospects and external sector as well as the development in the foreign-exchange market, including the dollar, interest rate differential and the performance of the yuan will influence the ringgit’s outlook.”
Lee added Bank Negara would wait for more data on the economy’s direction before changing its monetary course.
“An early rate cut is likely if GDP growth slows to 3% to 3.5% and domestic demand is under threat due to the spillover effects of a sharp downturn in export demand,” he said.
Meanwhile, CGS International Research has revised down its GDP forecast for Malaysia in 2025 from 4.6% to 4.2%.
The revision reflects the heightening trade war at a pace much more than it expected. Despite the 90-day pause which will likely lead to some strong export demand post-pause, there is unlikely any support for the economy ahead.
“Because of the GDP revision downward, it makes sense to expect that the overnight policy rate could be adjusted downward. We expect a 25 basis point (bps) cut to 2.75% reflecting a more challenging external environment.
“Having said that, we think Bank Negara will still remain data dependent. It needs to balance the risk of the upcoming sales and service tax expansion and RON95 subsidy removal while simultaneously considering the repercussions of the trade war on Malaysia’s economy.
“As such, I think the bank will signal if a rate cut is upcoming. Bank Negara’s next meeting is on May 8, which is something to look forward to,” he said.
Lavanya also believes the central bank will wait and watch, rather than pull the trigger on rate cuts imminently.
“We see a rising risk that the government could delay the RON95 rationalisation, considering the sharp drop in global oil prices and heightened external headwinds from US tariff policies.
“More importantly, there is limited clarity on the timing and magnitude of tariff implementation, particularly for semiconductors, which is a crucial input in determining the impact on Malaysia’s GDP growth.”
Lavanya forecast a cumulative 50-bps rate cut by Bank Negara in 2026, with the caveat that these could be brought forward if growth starts to slow sharply in 2025.
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