The ringgit could weaken slightly in the immediate term as the US economy become more constructive
by SHAHEERA AZNAM SHAH / pic by TMR FILE
THE steady benchmark rate announced by the US Federal Reserve (Fed) on Wednesday favours the ringgit in the near future as the low rate injects confidence in the greenback, economists said.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the measure indicates the economic powerhouse is confident in revitalising its economy, thus providing supports to its businesses.
The Fed, in its recent two-day policy meeting, announced that it’s keeping interest rates near zero, at 0% to 0.25%, indicating it will maintain the rate until 2023.
“With the Fed committed to keeping their benchmark rates low, it could translate into strong ringgit at some point in the future.
“But in the meantime, the focus will be the sharp revision of the US’ GDP contraction for 2020 from the 6.5% drop forecast made in June to 3.7%.
“It implies that the severity of the impact from Covid-19 has been fairly contained, allowing for the reopening of the economy to take place,” he told The Malaysian Reserve (TMR).
At the time of writing, the greenback had risen 0.05 points to 93.27 based on the US Dollar Index while the US dollar against ringgit depreciated 0.13% to 4.137.
“The ringgit could weaken slightly in the immediate term as the view on the US economy has become more constructive,” Mohd Afzanizam said.
Sunway University Business School economist Prof Dr Yeah Kim Leng (picture) said the decision by the Fed did not come as a surprise as the US has adopted accommodative monetary policies.
“The US interest rate is already near-zero level and further cuts are unlikely to provide further support to its economy. Similar to other countries, the US government and the Fed are looking at other policy tools, especially the use of fiscal policy, to support the economy against the pandemic impact.
“More importantly, they also look at the unconventional policy measures particularly in the use of quantitative easing (QE) through the purchase of mortgage assets from the banking systems to ensure the injecting of liquidity to the US financial markets,” he said.
Yeah added that maintaining the rates would support the dollar in the anticipation of the US election in November.
“The negative sentiment on the US dollar given its interest has been at near-zero levels is due to the QE measure and the weakness of the economy especially due to the severe impact of Covid-19.
“All of these challenges have returned the dollar as holding the rich steady will help to prevent further erosion on the greenback,” he said.
Due to that, Yeah said the ringgit is expected to hold steady against the US dollar, while further dollar weakness will be attributed to the performance of its economy and no longer to the cuts in its interest rates.
“The weighing factor on the US dollar will shift to the performance of the economy, especially on the recovery momentum and its election, which are creating uncertainties on the currency and financial markets,” Yeah said.
Mohd Afzanizam said a sharp appreciation of the ringgit could affect exports due to the foreign-exchange discrepancy.
However, given that the technology sector is expected to pick up its pace this year alongside the strong demand for gloves, exports should perform favourably in the remaining period of 2020, he added.
Yeah said while countries are still recovering from the Covid-19 impact, Malaysia should be focusing its trade regionally, particularly on countries that have shown signs of revival in their economic activity.
“Export depends on whether the US economy can sustain its momentum of recovery. The US’ GDP is driven by its consumption, so if the negative impact on consumption is still intact, the import from Malaysia will likely remain weak.
“Our external demand will have to depend on Asia, especially China led by its quick recovery. We should be focusing on regional demand rather than the US,” he said.