Stronger ringgit, Fed shift could draw capital to Malaysia

New Straits Times

6 hours ago

KUALA LUMPUR: Malaysia could attract renewed capital inflows into its bond and equity markets, underpinned by a stronger ringgit and a possible shift in US monetary policy.
UOB Kay Hian Wealth Advisors Sdn Bhd head of investment research Mohd Sedek Jantan said the appreciating ringgit enhances Malaysia's import purchasing power and may boost foreign interest in local financial assets.
However, he cautioned that the scale and durability of these inflows would depend on macroeconomic fundamentals, monetary policy stance, and investor sentiment relative to regional peers.
A Wall Street Journal report that US President Donald Trump is considering an early announcement of his nominee for the next Federal Reserve (Fed) chair has reverberated across global markets, with potential implications for Malaysia.
"Markets are beginning to anticipate a shift in US monetary policy, potentially resulting in a weaker greenback against the ringgit.
"At present, with the US Dollar Index (DXY) at 97.4 and the USD/MYR pair trading at approximately 4.225, the near-term trajectory of the ringgit is likely to hinge on the direction of US monetary policy," he told Bernama.
DXY, which measures the US dollar against a basket of six major currencies, often influences global markets, including the ringgit's performance and Malaysia's export competitiveness.
The ringgit has rebounded in recent days, rising from RM4.2948 per US dollar on June 23 to RM4.2327 on June 26, a 1.5 per cent gain.
Trump, the Fed, and the Ringgit's Path
Mohd Sedek noted that markets are aware of Trump's repeated criticism of Fed Chair Jerome Powell, particularly over delays in cutting interest rates.
A new appointee is expected to align more closely with Trump's economic preferences, favouring earlier and more aggressive rate cuts to address inflationary pressures from trade policies, including reciprocal tariffs currently on hold until July 9, 2025.
These tariffs have contributed to the Fed's cautious approach to easing.
"Should the Fed implement a rate cut, potentially as early as September, with a 25 basis point reduction, the expected interest rate differential between the US and emerging markets would narrow, making non-dollar assets relatively more attractive.
"This is consistent with uncovered interest rate parity, where lower US yields would reduce the incentive to hold dollar assets, thereby exerting downward pressure on the US dollar," he said.
Mohd Sedek said a shift towards looser US monetary policy could also trigger a reallocation of global capital into higher-yielding emerging market assets, supporting currencies like the ringgit.
This portfolio rebalancing could be further amplified if investor confidence improves in tandem with greater clarity from the Fed.
"Under these conditions, an appreciation of the ringgit to around 4.15 is plausible, with potential for further gains.
"While currency movements are inherently complex, shaped by both cyclical and structural forces, a scenario in which the ringgit trades below 4.15 by year-end is not implausible, particularly if global risk appetite remains favourable and Malaysia's macroeconomic fundamentals remain intact," he added.
Exporters Seen Resilient Despite Ringgit Strength
While the ringgit's gains have been modest, Mohd Sedek said Malaysia's export base is highly diversified and increasingly integrated within the region.
A significant portion of exports to Asean, China and East Asia is denominated in local or regional currencies.
In addition, the Malaysian government, working with regional partners, has been actively promoting local currency settlement mechanisms to reduce reliance on the US dollar.
"This reduces the pass-through effect of MYR-USD fluctuations on trade competitiveness, particularly within Asia," he said.
He added that Malaysia's key export sectors—such as semiconductors, palm oil, petrochemicals and machinery components—compete more on value-added, supply chain resilience and compliance standards than on pricing alone.
This offers some protection from currency-induced pricing shifts.
For example, high-tech electrical and electronic exports are typically less price-sensitive than commodity exports, allowing Malaysia to maintain market share despite ringgit strength.
That said, he warned that policymakers should remain alert.
If the ringgit strengthens too quickly or significantly, profit margins of small and medium-sized exporters and low-margin manufacturers could come under pressure.
"However, this would warrant a targeted policy response — for example, fiscal support or foreign exchange risk management tools — rather than an immediate monetary recalibration.
"The appropriate policy approach, therefore, is vigilant but not reactive, ensuring macro stability is not compromised in an attempt to micro-manage currency levels," he added.