Ringgit slides despite recovery due to US rate hikes

PETALING JAYA: Despite the economy doing well in the face of global challenges, the ringgit continues to weaken against the US dollar due to the high inflation rate and aggressive rate hikes there.

The ringgit was traded at RM4.503 against the dollar at the close of business yesterday.

World Bank Group lead economist for Malaysia Apurva Sanghi said from the macro, meso and micro perspectives, Malaysia’s Gross Domestic Product is expected to grow by 5.5% this year.

He said this was higher than the global growth of 2.9% and regional growth of 4.4%.

Higher commodity prices have also benefited Malaysia as the country exports commodities such as palm oil, liquefied natural gas and petroleum, which account for 80% of all commodities.

Sunway University economist Dr Yeah Kim Leng, in explaining the weak ringgit, said the primary factor for the strong US dollar is the action taken by the US Federal Reserve to continuously increase interest rates to combat high inflation.

He added that other factors in play include the easing of commodity prices such as palm oil, crude oil and natural gas.

“The global slowdown in demand for such items is having a dampening impact on the ringgit, which has been undervalued against the US dollar. But now, it’s even more undervalued.”

He said if we looked at the basket of currencies of Malaysia’s major trading partners, the ringgit has been relatively stable.

However, he added that the ringgit will continue to depreciate against the US dollar because the high-interest rate in the US is a major contributing factor.

“The exchange rate depreciation will continue because of short-term funds outflow from the ringgit to the US dollar as investors are interested in making as much profit as possible,” Yeah said.

He pointed out that the US dollar has surged against all currencies, not only the ringgit.

“Once the US economy slows down and the inflation rate starts to fall, only then will the US dollar begin to weaken. For the inflation rate to come down, the US economy needs to contract and there are already signs of this starting to happen.”

Yeah said the dollar’s weakening will most likely become apparent next year as demand for goods in the US starts to slow down.

Universiti Tun Abdul Razak economist Dr Barjoyai Bardai said the ringgit’s weakening is the natural course of demand and supply.

He said demand for the US dollar is currently strong and there is a lack of supply while demand for the ringgit is low but supply is high.

“Investors continue to take the ringgit out of the country and invest in the US due to higher returns.

“This will continue as long as US interest rates remain high as there are better returns from investing in the US,” he said, adding that the Fed increased the interest rate by 50 points, which attracted short-term investors.

Barjoyai also said about 80% of Malaysia’s needs are imported in US dollars as a means of payment.

He said foreign workers also contribute to it as they send back an estimated RM60 billion a year, thus having an impact on the ringgit.