KUALA LUMPUR (Jan 13): The Malaysian ringgit could face downward pressure due to the possibility of new US tariffs on China and uncertainties over the direction of the US Federal Reserve's (Fed) terminal rate, economists cautioned.
Like other Asean currencies, the ringgit is seen as more vulnerable to incoming US President Donald Trump’s policies due to Malaysia’s export-driven economy and its sensitivity to China’s growth. Economists project the local currency to trade between 4.25 and 4.60 against the US dollar by year end.
Malaysia’s significant trade surplus with the US could draw unwelcome scrutiny, with the country’s prominent semiconductor sector particularly exposed to tariff risks, it said.
Nonetheless, HSBC projects a moderate depreciation of the ringgit against the US dollar in 2025, supported by ongoing foreign exchange policy measures.
However, it cautions that the effectiveness of "moral suasion" — government interventions to support foreign income repatriation — may weaken if the balance of payments, which includes the current account, net foreign direct investment (FDI), and portfolio flows, continues to deteriorate. The balance of payments has been in deficit for five consecutive quarters, after peaking in the second quarter of 2020.
Despite this, HSBC highlighted some positive factors that may help offset outflow pressures, including the country’s record amount of FDI applications in the last three years, which could be gradually realised in the coming years.
Additionally, the government's commitment to reducing fuel subsidies by mid-2025 and implementing other fiscal reforms could provide further support to the ringgit, it said.
The ringgit emerged as the top-performing emerging market currency in Asia in 2024, at one point trading at 4.1235 against the US dollar.
However, sentiment change in the fourth quarter strengthened the US dollar, leaving ringgit gains to just 2.9% in 2024. At the time of writing on Monday, the local currency is trading lower at 4.5075 against the greenback.
Bank Muamalat Malaysia Bhd chief economist and social finance head Dr Afzanizam Abdul Rashid pointed out that the primary uncertainty seems to stem from whether the Fed will cut interest rates, as economic data suggests the US economy remains resilient.
In December, the US added 256,000 new jobs — the second-highest figure for 2024 — while the unemployment rate continued to decline, reaching 4.1%.
“The other is Trump 2.0 (policies). Thus far, the vibes have been unclear, fuzzy, and uncertain. We know that financial markets dislike uncertainties. When that happens, the demand for the safe-haven currency, namely the US dollar, tends to rise,” Afzanizam told The Edge.
Similarly, BIMB Securities Research anticipates continued pressure on the ringgit, as foreign investors are likely to reduce their holdings in both equities and bonds due to the wider yield spread between Malaysia Government Securities (MGS) and US treasuries, driven by rising US treasury yields.
It also alluded to stronger-than-expected US job market data, which it said solidified further the case of ‘higher for longer’ of the Fed’s federal funds rate.
“That said, the Malaysian bond market is well supported by local investors and we do not expect a foreign exodus to trigger a significant spike in MGS yields,” it added.
BMI, a Fitch Solutions company, sees limited gains for the ringgit against the US dollar in 2025, with expectations for it to trade at 4.40 by year end.
The research house, meanwhile, revised its end-2025 US rate forecast to 3.5%, from 3%, following Trump's presidential election win.
"Over the medium term, the ringgit looks set to remain on a gradual appreciatory trend on the back of a robust growth outlook and sustained current account surplus.
"Looking ahead, while interest rate differentials between the US and Malaysia will narrow in favour of Malaysia, we think that a higher Fed terminal rate will keep a lid on this appreciation," it said.
"A hawkish Fed poses upside risks to our US interest rate view, which could see it cut by 50-75bps (basis points) less than our current forecast (100bps) and in turn leaving less scope for the ringgit to appreciate. By the same token, if Trumpflation proves to be greater than expected, this would prompt the Fed to implement fewer rate cuts and constrain the ringgit’s ability to strengthen," it added.