Ringgit may strengthen if US slows down policy tightening

KUALA LUMPUR: The continued undervaluation of the ringgit will provide some room for the local currency to strengthen, should there be a slowdown in the pace of monetary policy tightening by the US Federal Reserve (US Fed).

MIDF Research in a report yesterday said the ringgit remains undervalued based on the real effective exchange rate, adding that it could appreciate to RM4.25 per dollar by end2022.

“With the US Fed expected to slow down the pace of its policy tightening towards the end of year, we foresee less support for the dollar to strengthen further.

“In other words, movement in the financial markets would pose less drag on emerging market currencies,” the research house said.

It also noted the possible reversal of financial flows towards emerging markets and that improved appetite for risk assets will be a positive for the ringgit.

Emerging market currencies also stand to gain from the improved growth outlook in China should Covid-19 lockdowns ease there, since these currencies were negatively impacted by the lockdowns that were reimposed in the second quarter of 2022.

MIDF Research said its forecast of an eventual appreciation of the ringgit takes into account the improved growth outlook and sustained current account surplus of the country.

“Looking at improving growth momentum, elevated commodity prices and increasing domestic activities on the back of economic reopening, we believe the fundamentals are more in favour of a stronger ringgit,” it said.

It also noted that the ringgit had actually strengthened against other currencies, according to the nominal effective exchange rate basis from May 2021.

“Unfortunately, movements in the financial market, which are more sensitive to the US interest-rate decisions, caused the ringgit to weaken specifically against the dollar,” it said.

However, it noted that while the market is now broadly expecting another 75-basispoint (bps) hike in September, the pace of rate hikes in the United States is also expected to slow down eventually.

“More importantly, the pace of interest rate hikes is expected to normalise back to 25 bps from the November meeting, arguably due to lessening inflationary pressure from easing commodity prices as well as the anticipation of a slowing US economic growth as early as later this year.

“Due to these reasons, we expect the dollar-to-ringgit foreign exchange rate to begin falling in the fourth quarter of this year, to be assisted by the returning funds eastward, as the US economic growth may exhibit relative weakness vis-a-vis emerging economies, including Malaysia,” it added.