PETALING JAYA: A basket of Asian currencies is feeling the heat this week, after latest comments from a US Federal Reserve (Fed) official again indicated the policymaker is not prepared to lower rates even as 2024 nears its second half.
The ringgit, perhaps not surprisingly, also edged lower from RM4.7105 to the dollar on June 20 to RM4.719 yesterday, as the greenback strengthened against most Asian notes including the Chinese yuan, the Japanese yen, the Singapore dollar and the Indonesian rupiah.
To be fair, none of this should come as a surprise as the Fed fund rates movement continues to hold the primary power of dictating the direction of most other forms of investments globally.
This became all the more relevant earlier in the week as Fed governor Michelle Bowman remarked that it was not time to start easing off on rates, in fact commenting that she was open to raising them if inflation does not pull back.
Her comments led Asian notes sliding to their weakest in more than 19 months, with the Bloomberg Asia Dollar Index easing 0.1% yesterday to the lowest level since November 2022.
The move came after the Philippine peso and the Indian rupee closed near record lows on Wednesday, while the South Korean won closed in on the key 1,400 per dollar level.
Although acknowledging that the pressure on Asian currencies this year has been relentless, head of Asian Foreign Exchange (forex) Research at HSBC Joey Chew, nevertheless, thinks the ringgit has been rather contained against the dollar compared to other currency pairs.
Being the world’s reserve currency, she emphasised that the greenback is strong because it is high yielding and has historically done well during periods of uncertainty in financial markets.
More pointedly, she said: “Recently, there have been surprises from various election outcomes.
“The market is probably preparing for more uncertainty ahead with the upcoming French and UK elections, and then the US elections later in the year.”
Moreover, in recent weeks, Chew told StarBiz that the dollar has also been gaining on the yuan, as recent dividend outflows by Chinese companies to shareholders, which is expected to last up to August, are adding to the forex demand-supply imbalance that has been present in China since July last year.
She added that the relative stability of the ringgit against the dollar could be related to the persuasion from Malaysian authorities for government-linked companies to increase their forex supply or manage their forex demand.
“This is helping to buy time until the trade surplus improves, which we expect may happen later this year. Malaysia’s manufacturing purchasing managers’ index or PMI finally rose above 50 in May,” she said.
Chew added that her latest 2024 forecast for the local note against the greenback is RM4.68 by year-end.
At the same time, another economist at a local research firm believes Asian currencies would see more pressure compared to equities for as long as the Fed continues the stalemate on rates.
“As a whole, geopolitical tensions notwithstanding, we can see the global economy improving with pockets of demand coming especially from the technology sector, but the constraint on Asian notes would be persistent,” he said.
Hence, as the world waits with bated breath, the economist believes any change in rates this year will move markets and currencies in an inverse direction relative to the dollar.
He said: “Malaysia can itself do plenty to improve competitiveness and efficiency to strengthen the ringgit in general, but over the short term such as for the end of 2024, it is still the Fed that calls the shots as to how the local currency will perform against the dollar.”
In resonance with Chew’s perspective, Nouri Chatillon, economist at global credit insurance firm Coface said since the beginning of the year, Asian currencies have been under unabating depreciation pressure, as US interest rates have remained at high levels.
“Coupled with that, in its last meeting, the Fed scaled back its rate cut expectations from three in March to just one in June.
“This pushed the ‘higher for longer’ narrative, which is likely to translate into a ‘stronger for longer’ US dollar, thereby maintaining depreciation pressure on Asian currencies,” he explained.
Despite recent decreases in US inflation, he said the situation has remained sticky, which suggests that even if there is a Fed easing cycle the magnitude of rate cuts will be limited, offering only little room for Asian central banks to lower rates this year.
A reinforcement of the higher-for-longer narrative, due to further hawkish Fed officials’ remarks, could be a possible catalyst for the strengthening of the greenback this week, which in turn led to the weaknesses in Asian currencies, Chatillon said.
Stating that she is keeping a cautious stance pertaining to considering future changes in policy direction, the Fed’s Bowman indicated it would all be data-driven.
“Should the incoming data indicate that inflation is moving sustainably toward our 2% goal, it will eventually become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive,” she was reported to have said.
“However, we are still not yet at the point where it is appropriate to lower the policy rate,” she added.
