OCBC FX strategist Christopher Wong.
PETALING JAYA: Just when Malaysians are getting used to the strengthening trend of the ringgit against the US dollar in recent times, October so far seems to suggest the greenback is regaining some of its strength.
From a close of RM4.1190 to the dollar on Sept 30, the greenback has appreciated 5.3% hitherto this month to RM4.3360 at the time of writing, propelled by fading expectations that the Federal Reserve (Fed) would repeat its giant 50-basis-point (bps) rate cut, which led to a widespread selling of US Treasury bonds.
Of interest, economists and currency experts are shying away from making long-term predictions as to how the ringgit could fare against the dollar, with OCBC foreign-exchange (forex) strategist Christopher Wong acknowledging that there is two-way volatility ahead.
He said the up move of the dollar in October has been a result of a few drivers, including markets unwinding prior to a dovish expectation on the Fed’s rate cut trajectory and to some extent, even factoring in the plausibility that it may opt to hold rates at its next meeting.
“In addition, better US data on top of factoring in geopolitical tensions in the Middle East and also taking into consideration the US election risk premium are also possible reasons for the dollar’s appreciation,” he told StarBiz.
In the betting markets, Wong notably remarked that the Donald Trump-over-Kamala Harris spread has widened sharply in favour of former president Trump, which could heighten worries of tariffs, inflation and fiscal concerns.
“Trump’s proposed tax cut would add US$7.5 trillion more to US debt, according to estimates from non-partisan and nonprofit committees for responsible federal budgets.
“Defensive positioning or ‘Trump hedges’, such as going long on the dollar and gold while shorting the Chinese yuan may still gather traction in the near term, given the fluidity of election developments and geopolitical uncertainties,” he said.
Commenting on whether the October appreciation could again morph into long-term strength for the dollar, Wong opined that with the US presidential election around the corner and the Federal Open Market Committee meeting a few days after the election, developments will remain fluid, with traditional polls and prediction markets seeing growing divergence.
He said the election outcome will have implications on forex as shifts in fiscal, foreign and trade policies may occur, depending on whether Trump or Harris is elected as the next president.
“This itself is already a big unknown and can be binary for the dollar,” he said.
Briefly analysing both scenarios, Wong said a Trump win may see a play-up of US-China trade tensions and should inject some uncertainty to markets, implying that the downward path of the dollar may be bumpy and may even face intermittent upward pressure if US-China trade tensions escalate.
On the other hand, if Harris wins, it could signal more measured engagements with China, and volatility as well as uncertainty should ease.
“The dollar can trade on the backfoot and Asian, as well as high-beta currencies such as the Australian dollar, may find better support,” he said.
Meanwhile, economists Geoffrey Williams and Carmelo Ferlito believe the appreciation of the dollar is merely a normalisation process, with the former noting that external factors such as the intervention by Bank Negara to encourage repatriation of funds have significantly strengthened the ringgit.
Williams added that the clear change in the US rate cycle, ending months of speculation on when the rate cutting would be carried out, coupled with geopolitical tensions and the upcoming US election, also generated news and market reactions.
“These caused volatility in the market and now we are seeing a correction due to normal market activity,” he said.
Ferlito, who is also chief executive of the Center for Market Education, concurred by saying that financial markets react based on expectations and are thus emotional.
“Now that the emotion about the rate differentials has faded, we are seeing exchange rates normalising,” he said.
At the same time, Williams explained that the ringgit-dollar rate of around the RM4.80 level seen earlier in the year had clearly undervalued the former, but the Malaysian note’s appreciation to under the RM4.10 level against the greenback at the end of September was “equally unreasonable”.
He observed that the ringgit’s strengthening was very short term and its weaker standing earlier in the year was more protracted, while sticking by his earlier prediction that the current levels around RM4.20 to RM4.40 should be closer to fundamentals and are thus more sustainable.
“External factors outside of the control of Malaysian policymakers will always matter especially in the United States, but for now the domestic policy agenda is good,” said Williams.
Economics professor at Sunway University and adviser to the Finance Ministry Yeah Kim Leng said the dollar’s appreciation is due to the resilience of the US economy, which has tempered rate cut expectations, while anticipation of continuing inflationary persistence coupled with concerns over US deficit levels have led to the dumping of US Treasuries.
“The selling has caused yields to rise and the dollar to strengthen amid improving confidence that the economy is on track to a soft landing.
“Nonetheless, given the prevailing global uncertainties and its intensifying tension with China, the risk of a sharper-than-expected slowdown or downturn continues to cast a pall over the US economy,” he projected.
As such, he is of the view that the dollar is undergoing a temporary lull as US interest rates remain high with negative consequences on consumer and business borrowing, as well as further deterioration of the balance sheets of US banks.
Yeah added that the changing US Fed and market expectations leaning towards a “slower and longer” interest rate trajectory has caused currency markets to adjust accordingly.
“However, amid the ‘ups and downs’ in the currency markets, the dollar is expected to remain on a downward trend, in line with its monetary tightening cycle,” he pointed out.
On that point, Asia Pacific economist at Coface Nouri Chatillon said that further possible rate cuts should put downward pressure on the dollar, but the looming presidential election should dominate in the near term.
What is fascinating is that he said this will make it challenging to predict the short-term path for the dollar, given the highly uncertain election outcomes.
“Even if Trump wins, multiple factors could pull the dollar in opposite directions. His pro-business policies and the dollar’s safe-haven appeal could strengthen it, while his preference for faster Fed rate cuts might weaken it,” said Chatillon.
