KUALA LUMPUR: The foreign exchange market is turbulent again with the ringgit being kept in check by regained strength in the US dollar.
This is coupled with the renewed weakness in China’s yuan with Beijing signalling its readiness for monetary easing to counteract its economic slowdown.
This situation is pressing the ringgit to test its lows in the last one month and the local currency appears now to have prematurely ended its strong recovery path which was widely seen by the market last year when it gained 2.7% against the US dollar.
Despite its strong economic fundamentals, the ringgit’s fate in the near term appears to be closely linked to currency action of major trading partners: China and the United States.
The local unit has weakened by about 0.91% since the beginning of 2025, trading at the 4.5130 level against the greenback yesterday as the political risk factor in Europe, China’s deflationary worries and the yen’s weakness sent investors into the dollar.
The trend appears to point towards the ringgit remaining soft for the time being especially with the upcoming inauguration of Donald Trump which could signal major changes to its trade policies and market access and in the way Washington deals with trading partners and allies in the region.
But the local unit’s weakness is not isolated and appears to be a regional phenomenon as Asian currencies including the Philippine peso and Thai baht having also seen a similar magnitude of decline against the dollar since the new year.
Fund managers gave further insights into the recent currency movements pointing out that the dollar’s recent strength is mainly due to the significant rise in real interest rates there.
This causes the real interest rate differentials between the United States and Malaysia for example to widen, thus heightening the appeal of the dollar even more.
“Beyond Trump’s tariff strategies and the People’s Bank of China’s (PBoC) decision to allow the yuan to weaken, a significant driver of the US dollar is the rise in US yields following the Federal Reserve’s (Fed) interest rate cuts.
“So, yes, it is quite the paradox.”
“The jump in yields is due to term premiums – where investors demand higher yields to compensate for larger expected Treasury (debt) issuances and it comes amidst heightened vigilance from the Fed regarding inflation and potential hikes in the neutral rate,” SPI Asset Management’s managing partner Stephen Innes told StarBiz.Innes said financial markets are speculating that the Trump administration’s national treasury might soon increase coupon sizes, leading to more substantial bond auctions at a time when the Fed’s outlook is becoming more stringent.
“This anticipated shift has put pressure on those positioned against the US dollar, suggesting a potentially volatile financial climate ahead.
“The real yield on the 10-year Treasury notes have seen a significant increase over the past month, moving from 1.9% to 2.26%.
“This marks a rise of 36 basis points, positioning the yield at 50 basis points higher than its level at the beginning of 2024.
“This shift indicates a substantial tightening in real yield terms over the year,” he said.
He added the pervasive economic gloom in China is underscored by a relentless decline in producer prices and anemic consumer inflation, pointing to a deep-seated reluctance among Chinese consumers and businesses to spend.
Trump 2.0 could trigger a new trade war, leading China’s deflationary spiral to only deepen and pose a challenge to its economic stability, Innes said.
He believes the global stage is set for a year in which monetary strategies clash with geopolitical realities, potentially reshaping the financial landscape as markets navigate the unfolding drama.
Meanwhile, MUFG Bank Ltd noted the emerging market currency index had fallen for the fifth straight week due to the stronger US dollar and weakness in the yuan.
It noted the dollar-yuan pair had risen beyond the critical 7.3 level after authorities had defended that level for weeks.
“The PBoC has set the dollar-yuan daily fixing rate at 7.1878 to contain the pace of currency depreciation.
“The upper bound of the trading band is now at 7.3316, which is only 0.14% above last Friday’s closing spot rate.
“Additionally, the US dollar will also likely be supported by elevated US treasury yields, with the two-year and 10-year yields staying above 4%,” MUFG Bank said in a note.
It expects weakness in Asian currencies like the ringgit to continue leading up to Trump’s inauguration on Jan 20 with “Trump trades” persisting in anticipation of US tariff hikes.
Commenting further, Country Manager of StashAway Malaysia Wong Wai Ken said the ringgit has weakened some 9.6% in just three months along with other major currencies.
The local currency had weakened from its highs last September – from around RM4.11 to RM4.513 per US dollar as of yesterday.
“In this time, Trump was re-elected, which boosted the US dollar, since the president-elect is a known protectionist.
“Furthermore, the Fed has come out in December to tamper market hopes of aggressive rate cuts in 2025, and signalling that two cuts is the most likely outcome.
“Citing stubborn inflation, the Fed signalled that rates are likely to stay higher for longer at 4.25% to 4.5%, which is higher than Malaysia’s overnight policy rate of 3%,” Wong told StarBiz.
“This interest rate premium is likely to keep exchange rates steady within a range of around 4.5 to a dollar, with a slight weakening bias given that oil prices and China’s economy remains weak,” he added.
In its macro foreign exchange note, Maybank Investment Bank Research said the US’ jobs data remain the focus now as markets evaluate how strong the US economy can keep holding up.
“However, there could also be some anxiety in markets building up to the Trump inauguration amid uncertainty on what his first announcements may be just after he takes office. Concerns in particular are related towards tariffs, immigration and tax policies and the impact they can have on inflation in addition to the pace of Fed easing,” the research house said.
“Besides that, going into next week, there is also the Federal Open Market Committee minutes, which would help shed more light on the more hawkish pivot adopted by the Fed last month,” it added.
