Ringgit falls on stronger dollar direction, markets await Fed decision

The greenback proves resilient despite rising growth and trade concerns, and further gains have not been ruled out for the currency


THE ringgit pared back gains against the greenback following a resilient US dollar performance, while marginally stronger oil prices failed to contain the decline.

The Malaysian currency closed higher against the dollar at RM4.1195 last week compared to RM4.1128 the week prior, representing an approximately 0.2% depreciation.

This is in spite of markets widely anticipating the US Federal Reserve (Fed) to cut its key interest rate at the end of the month by either 25 basis points (bps) or 50bps, indicating the start of further monetary easing by the US central bank.

If it were to materialise, the development will be a boon to regional and emerging-market currencies such as the ringgit which have long bore the brunt of an aggressive Fed rate hike cycle in the past.

However, the US dollar proved resilient despite rising growth and trade concerns, and further gains have not been ruled out for the greenback.

FXTM market analyst Han Tan said most Asian currencies were set to end last week on the backfoot against the dollar, with the US Dollar Index (DXY) gaining approximately 0.7% during the week.

“The greenback has been whipsawed of late by shifting market expectations over the scope of this week’s widely expected Fed rate cut,” he said in a research note.

“Despite the dovish rhetoric employed by the Fed, the DXY has shown remarkable resilience, recovering from sub-96 levels in late-June to now be within touching distance of the 98 mark.”

The DXY gained approximately 1.1% over the past month to close at 97.91 last Friday, only 9bps short of the 98 mark.

Han said a better than expected US GDP print for the second quarter of the year (2Q19) could prove another stepping stone for the dollar index to hit the 98 mark for the first time since May.

US GDP came in at a 2.1% growth in 2Q19 — down from the 3.1% growth noted in the preceding quarter, but slightly higher than Wall Street’s forecast of a 2% gain — as consumer expenditure rose, while business investments declined.

“The greenback is expected to remain fundamentally supported by the US economy’s resilience compared to its major developed peers,” Han said.

Vanguard Markets Pte Ltd managing partner Stephen Innes said the market has settled on a 25bps cut by the Fed at the end of the month, with room for additional easing.

“If the Fed cuts at the upcoming US Federal Open Market Committee meeting — which appears highly likely, given officials’ statements — it will inaugurate the beginning of a new Fed easing cycle,” he said in a research note.

“Anything other (than that) will trigger an aggressive symmetrical response across a swath of risk assets.”

Meanwhile, Brent crude oil ended last week 1.6% higher at US$63.46 (RM261.46) per barrel versus US$62.47 per barrel a week prior, largely attributable to US sanctions on Iran which is affecting the latter’s oil supply to markets.

While this is providing support to the oil market in terms of supply, trade talks between the US and China in Shanghai this week could trigger fresh demand concerns if relations between the world’s largest economies deteriorate.

“Oil prices ended last week (as such) when they started, as traders are weighing tensions in the Middle East and the trend of weekly inventory draws against persistent concerns about the global economic downturn,” Innes said.

“I worry that this week’s trade talks could be a negative catalyst for oil market sentiment in this delicately balanced supply and demand equation.”

The US and China are the world’s largest oil consumers, consuming a combined 32.48 million barrels a day or 33% of total oil consumption in 2016.

A re-escalation of trade tensions between Washington and Beijing would put a significant dent in global oil demand.