KUALA LUMPUR (Jan 8): As the ringgit enters 2026 following a year of record-breaking performance, economists are divided on whether the local currency can sustain its momentum or if it has finally hit a psychological "stall speed" at the 4.00 mark.

The local note, which gained over 10% against the US dollar in 2025 to lead regional peers, currently trades at 4.0575 against the greenback. While some analysts see a path towards the 3.90 range, others warn that the currency may already be "overbought".

Mizuho Research is betting on another year of outperformance, forecasting that the ringgit could climb as high as 3.96 by the end of 2026. According to the research house, the ringgit could breach the 4.00 threshold — a level not seen since mid-2018 — as early as the second quarter of this year. Its average forecast for the year is about 4.015, with the ringgit spending most of 2026 knocking on the door of 4.00.

In a report on Wednesday, Mizuho noted that the ringgit's strength is underpinned by Malaysia’s robust growth prospects, relative political stability, and ongoing fiscal consolidation.

“Should these factors hold in 2026, another bout of outperformance should not be discounted,” it noted.

Mizuho said sound economic programmes and a continued influx of foreign direct investment, paired with a central bank that remains far from dovish, will serve as marginal catalysts for the currency.

Bank Negara Malaysia has been keeping the overnight policy rate at 2.75% since its last cut in July 2025, to balance growth with stable inflation, which is projected to hover between 1.3% and 2% this year.

“In short, even if a repeat double-digit appreciation is a tall order in 2026, relative regional outperformance remains the base case,” Mizuho added.

UOB Global Economics and Markets, however, strikes a more cautious note. While they expect the ringgit to remain "firm", they view the 4.00 level as a ceiling rather than a door.

FX Strategist Peter Chia noted that despite Malaysia’s "remarkable fundamentals", the currency looks somewhat overbought. “We are a little more cautious about projecting strength beyond the four level at this point in time. Our forecast is for the ringgit to stay around four,” he said.

While it expects the US dollar to continue to weaken this year, falling about 3%, the sharp decline seen in 2025 due to "de-dollarisation" shifts following the US-initiated tariff war have likely run their course, leaving less room for the ringgit to surge.

And markets are pricing in two-to-three US Federal Reserve rate cuts this year, starting in May or June, coinciding with Jerome Powell’s departure as Fed chair, Chia noted. “This is broadly in line with swap market expectations for the second and third quarters. In fact, swaps are slightly more aggressive, pricing in an additional cut in the fourth quarter."

US rates are expected to trend towards 3% from their 5.5% peak. A return to zero-interest-rate policy is unlikely, Chia said.

“Even with last year’s trade war, US and global growth remained resilient. With the trade war now winding down, the macro backdrop looks positive at the start of the year. We are not expecting a US recession in 2026, and the probability of rates dropping to recession levels is very low,” he added.