Ringgit falls victim to US dollar strength

PETALING JAYA: With the US dollar gaining strength since mid-July after the United States raised its interest rates to a 22-year high, this dragged the ringgit down to its weakest level since 1998.

Risk aversion due to the ongoing Israel-Palestine conflict, which threatens geopolitical stability in the oil-rich Middle East, also hammered the ringgit as investors sought shelter at the safe-haven US dollar.

An analyst told StarBiz that the ringgit’s weakness could “sustain for the meantime”.

“The interest rate spread between the ringgit and the US dollar is a big reason, but uncertainties in the global macroeconomic conditions are adding pressure on the exchange rate.

“It will take time to ease, perhaps by year-end,” the analyst said.

The drop against the US dollar is not exclusive to the ringgit alone.

Other regional currencies such as Singapore dollar, Thai baht, Indonesian rupiah, Chinese yuan and Japanese yen have also depreciated against the greenback in the past several months.

In fact, the yen and rupiah have weakened slightly more than the ringgit against the US dollar since mid-July.

In that period, the ringgit depreciated by 5.3% against the greenback. Yesterday, the local note closed at 4.7695 per US dollar – the lowest level in 25 years.

The US Dollar Index, a common indicator of US dollar strength, has been on the rise for about two months and was recorded at 106.55 points as at press time yesterday.

An increase of the index above the 100-point mark represents the strengthening of the US dollar.

The US Dollar Index is a measure of the value of the US dollar relative to a basket of six foreign currencies.

AmBank Economic Research said the US dollar is tracking the upside to the US Treasury yields.

“US dollar strength was also supported by continued worries over the Middle East crisis.

“Remarks from Federal Reserve (Fed) officials (New York Fed president John C. Williams and governor Christopher Waller) implying more tightening is needed in the case inflation is not slowing as expected were particularly supportive to the US dollar,” it added.

Both Williams and Waller are Federal Open Market Committee voters.

It is noteworthy that the Fed, the central bank of the United States, raised the country’s interest rate to a range of 5.25% to 5.5% in July. This was the highest range in 22 years.

Meanwhile, Bank Negara in its recent Monetary Policy Committee meeting decided not to raise the overnight policy rate (OPR), taking into account the easing inflationary pressure domestically.

The benchmark rate was retained at 3%, which is still lower than early-2019’s level of 3.25%.

The decision to retain the OPR at 3%, while the Fed raised the rate to a range of 5.25% to 5.5%, has widened the interest rate differential between both countries and was partly a reason for the ringgit’s weakening.