A sooner than expected rate hike may easily rattle forex market and lead to intermittent depreciation of US dollar/ringgit

by NUR HANANI AZMAN / Pic by BLOOMBERG

THE ringgit is expected to be traded sideways in the near term as investors remain anxious over the US Federal Reserve’s (Fed) decision on the interest rate.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said a sooner than expected rate hike could easily rattle the foreign-exchange (forex) market and lead to intermittent depreciation of US dollar/ringgit.

“Signals from the Fed officials are somewhat mixed. Its chairperson Jerome Powell appears to be leaning on the side that higher inflation rate is transitory and therefore, the Fed is not in a hurry to raise the federal funds rate.

“However, some Fed officials are expressing their opinions that a rate hike has to happen in the near future, while asset purchase programmes would need to be lowered very soon,” Mohd Afzanizam told The Malaysian Reserve (TMR).

The ringgit is expected to be under pressure and to trade in a narrow range of RM4.14 to RM4.15 per US dollar following the Fed’s latest hint a rate hike might happen sooner than expected, according to Bank Islam economist Adam Mohamed Rahim.

“The improving US economy would likely bode well for a stronger US dollar in the immediate term.

“Nevertheless, headwinds could arise from the vaccination rates, which are expected to pick up in the coming months,” Adam told TMR.

The Fed indicated it would raise interest rates in 2023, but many market observers believe the US central bank is likely to do it earlier to contain inflationary pressures and provide support to employment.

ActivTrades senior analyst Ricardo Evangelista said the global forex narrative is currently dominated by the Fed’s more hawkish stance since last week.

“It triggered broad dollar strength and resulted in weakness among emerging-market currencies, which also affected the ringgit.

“The big question now is if the markets will settle after this first impact, or if we are looking at an emerging bullish trend for the dollar,” Evangelista told TMR.

He said investors’ jitters might be eased after Powell’s testimony to the Congress, resulting in the dollar rebound to fizzle out, hence positive for the ringgit.