PETALING JAYA: The uptick in US inflation data for January has strengthened the US dollar at the expense of other currencies including the ringgit, as traders dial back expectations of interest rate cuts by the Federal Reserve (Fed) this year.
The US consumer price index (CPI) report for January reported a reacceleration of consumer price growth with the main headline figure increasing at a faster pace than forecast by economists.
That triggered selling of the ringgit by foreign-exchange (forex) traders with the local unit closing some 210 points lower at a four-month low of 4.7845 against the greenback yesterday.
SPI Asset Management managing director Stephen Innes said the market is adjusting its expectations for US rate cuts. He added market sentiment reflects a recalibration, with expectations for 87 basis points of US rate cuts in 2024, down from 111 basis points before the CPI report and 146 basis points as of the end of January.
“We are nudging into the overshoot area that we had expected due to strong US economic data reigniting the US inflation flame.
“The adjustment brings market expectations closer to the Fed’s December dot plot, which suggests three rate cuts this year,” he told StarBiz.
He also noted the US dollar-yen pair broke through the 150 level, raising concerns about potential forex intervention by the Bank of Japan.
“Hence, that could keep a limit on how far the ringgit and other Asia currencies might weaken given the cross-Asia currency correlations on the yen.
“It is an intricate network of balancing currencies from a competitive trade advantage. If the yen or Chinese yuan weakens then other local currencies tend to follow suit, given Japan and China are the two powerhouse exporters in the region,” he added.
Innes has revised his forecast for the dollar-ringgit pair to 4.65 by year-end from 4.5, which was based on the Fed rate cuts of 125 basis points.
“We think the second half of the year is when the US economic data will ebb and inflation will follow suit.
“We still think a year-end target of 4.50 for the ringgit is feasible, especially if Opec compliance remains intact and oil prices remain supportive of Malaysia through the balance of trade route,” he said.
Prof Yeah Kim Leng, who is one of the recently-appointed finance advisers to Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim, said the local unit could remain under pressure until firmer signs of the impending interest rate cuts emerge.
“Other downward pressures on the ringgit include continuing weaknesses in the Chinese economy and commodity markets,” he said.
Nonetheless, Yeah expects the ringgit value to stabilise on account of stronger foreign capital inflows, pick-up in global trade and electronics cycle and sustained growth in domestic consumption, private investment and government spending.
“Another positive factor is the reduction in political uncertainties and concomitant rise in investor confidence as manifested in sustained foreign direct investment inflows,” he said.
Centre for Market Education (CME) chief executive officer Carmelo Ferlito said the US dollar remains the favoured reserve currency, but the Malaysian government can help the ringgit by having a clear commitment to a pro-market reformist agenda.
“In general terms, we may speak about a strong US dollar rather than a weak ringgit; the ringgit is weak as a consequence of the dollar’s strength. However, it is also due to domestic issues. In particular, the political economy’s direction of the coalition government remains very much uncertain.
“Over the past one and a half years, we have heard and witnessed contrasting signals, whereby initiatives to attract investments or statements in favour of a pro-business environment were often met by discordant policies like interference in the price system, restrictions on hiring policies, discussions about higher taxation for foreign-owned companies, etc,” he said.
Malaysia University of Science and Technology economics professor Geoffrey Williams also concurred that given the current volatile economic environment, investors are looking for safe-haven currencies like the US dollar and Singapore dollar.
“There are gains and losses to exchange rate movements. The weaker ringgit has helped exports even though global demand has been weak,” he said.
Tradeview Capital chief investment officer Nixon Wong said there is no need to panic as the US dollar can be expected to decline should the Fed begin to reduce interest rates likely by the second half of the year.
In the meantime, Wong said the government must focus on achieving fiscal discipline to steer the country in the right direction. This means growing the economy by increasing reserves and surplus rather than relying on deficits.
“Incoming foreign fund flows into Malaysia suggest that investors recognise the potential in the market due to new economic policies. As things start moving, if this trend continues, the ringgit may regain its strength,” he said.