KUALA LUMPUR (Aug 26): The ringgit is playing a catch-up game following a long period of underperformance, and is fairly valued at between 3.90 and 4.20 against the US dollar, according to the Malaysian Institute of Economic Research (MIER). 

In its monthly economic review released on Monday, MIER said that despite the ringgit currently being undervalued, indicators like the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) suggest that its fair value lies between 3.90 and 4.20 against the US dollar. 

The local currency was traded at 4.34 to the greenback at the time of writing. 

In the report, MIER said a cumulative 100 basis points (bps) rate cut in the US federal funds rate in 2024 could narrow the interest rate differential between the US and Malaysia to 125-150 bps, which could be favourable for the ringgit, as investors might seek to diversify their holdings in search of better returns.

“Malaysia’s ringgit stands to benefit from more than just US monetary policy,” it said. 

Domestic factors, such as fiscal reforms aimed at reducing the budget deficit and strong gross domestic product (GDP) growth, which is expected to reach or exceed 5% in 2024, could also support the currency.

Meanwhile, solid foreign direct investment, repatriation of funds by government-linked companies, and a sustained current account surplus driven by robust exports in electronics, tourism and services, further strengthen the outlook for the ringgit, it added.

Foreign investments into Malaysia’s equity and bond markets is another positive factor for the currency. 

“After experiencing an outflow of RM823.6 million earlier in the year, the equities market saw an inflow of RM1.3 billion in July. In the first half of 2024, foreign inflows into the bond market reached RM874.6 million,” MIER said.  

It foresees the ringgit appreciating to 4.20-4.25 by the end of this year, from 4.59 at the end of 2023. 

However, the prolonged strength of the US dollar may keep the ringgit’s average exchange rate around 4.60-4.64 against the dollar, compared to 4.56 in 2023, it added.