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PETALING JAYA: The key to strengthening the ringgit lies in clear policy communication, market liquidity and maintaining fiscal and monetary prudence, experts say.
Recently, concerns loom as the local unit crossed the RM4.70 mark against the US dollar on the US Federal Reserve’s (Fed) hawkish stance to keep interest rates higher for longer.
Trident Analytics chief research officer Peter Lim Tze Cheng said the greenback is not just gaining strength against the ringgit but is exhibiting dominance over all major currencies.
“The US dollar is likely to remain strong until the Fed indicates no more rate hikes on the horizon,” he told StarBiz.
However, he believed the confidence in Malaysia’s economy could potentially assist the local note gain traction amid these challenging conditions.
Meanwhile, Malaysia University of Science and Technology economics professor Geoffrey Williams believed controlling the exchange rate, as is done in Singapore and Hong Kong, may not be a feasible option for Malaysia.
Instead, he opined that the focus should be on strengthening the fundamentals.
“Economic policy should allow the exchange rate to serve as a shock absorber or automatic stabiliser,” he said.
Williams advocated a strategy for ringgit strengthening that centres on the clarification of policy, bolstering market liquidity and upholding strong fiscal and monetary policies.
These measures, he believed, will not only promote price stability but also encourage sustainable growth and investment.
Williams said the main drivers of the exchange rate at the moment continue to echo the trends seen throughout most of the year.
“Geopolitical uncertainty and a preference for safer financial investments in established markets are exerting significant influence on currency movements,” he noted.
However, he said it is crucial to also focus toward the enduring trends that have contributed to the ringgit’s weakness over the years.
“Consider, for instance, the state of the ringgit a decade ago when it traded at RM3 to the US dollar. A significant shift occurred since 2015, with the ringgit persistently valuing above RM4 to the dollar.
“This trend has intensified since January 2022, with the exchange rate fluctuating between RM4.20 and its current level of around RM4.70,” Williams added.
He believed these long-term trends suggest there might be more structural issues at play, influencing the ringgit’s performance over the years.
Both experts concur a weaker ringgit makes Malaysian exports cheaper but imports more expensive.
“Financial returns and investments are more risky if the exchange rate is volatile. So, in the long term, there are costs and benefits,” Williams said.
Furthermore, Lim highlighted the evident issue of imported inflation with a weaker local unit.
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