Ringgit to hit US$1 to RM5 by year-end?

 No News Is Bad News

 

Ringgit to hit US$1 to RM5 by year-end?

KUALA LUMPUR, Oct 19, 2023: The Ringgit today plunged to its lowest level since the Asian financial crisis 25 years ago to 4.7703 per US dollar, the weakest since 1998.

And economists are now expecting the Ringgit to breach RM5 to the Greenback.

And the Israel-Hamas war concerns have upped the ante amid the gloomy global economy and China’s seven successive months of economic slowdown - China is Malaysia’s largest trading partner.

No News Is Bad News reproduces below a news report on what the economists are saying about the Ringgit:

Nightmare scenario for ringgit a possibility, say economists

Ringgit breaching RM5 to US$1 cannot be ruled out amid concerns over the Israel-Hamas war.

David Pillai - 19 Oct 2023, 6:15pm 

The ringgit hit its all-time low of RM4.7250 to the dollar on Jan 7, 1998.

PETALING JAYA: Malaysians were jolted by news today that the ringgit has plunged to its lowest level since the Asian financial crisis 25 years ago to 4.7703 per US dollar, the weakest since 1998.

However, things could get even worse for the beleaguered ringgit, Asia’s worst performing currency after the yen, as economists are not ruling out the possibility it could breach the psychological RM5 to a dollar mark.

The latest weakening of the ringgit comes as the US dollar gains on safe haven demand amid concerns over the Israel-Hamas war.

The situation has been exacerbated by Malaysia posting seven straight months to September of decline in exports, partly due to a slowdown in China, its largest trading partner.

According to Bank Negara Malaysia (BNM) exchange rates data, the ringgit hit its all-time low of RM4.7250 to the dollar on Jan 7, 1998.

Sunway Business School Economics professor Yeah Kim Leng said given the currency’s volatility and uncertainties currently, the currency breaching RM5 to the greenback cannot be ruled out.

He said as the dollar is strengthening on prospects of further rise in US interest rates, it is likely to maintain its strength over other currencies.

However, Yeah pointed out the biggest poser here is whether it’s a permanent change or a transitory one.

“We expect the US dollar to reverse its position once its economy starts to cool, once it achieves a soft landing. When that happens, interest rate hikes will reverse.

“That’s the time when the strong dollar will gradually weaken and the ringgit and other currencies will retrace their strength against the greenback,” he explained.

Yeah reasoned it is not sustainable for the US dollar to remain at the current high level given its weakening economic fundamentals.

Malaysia University of Science and Technology economics professor Geoffrey Williams concurs there is a possibility the ringgit could hit the RM5 mark.

However, he believes the ringgit’s low level is transitory with the long-term range of RM4.00-4.50 likely to be permanent.

The main drivers for the ringgit’s fall are geopolitical uncertainty and a move to safer financial investments in established markets, he said. “This is now worse than before because of the Middle East conflict.”

Israel-Hamas conflict

Universiti Malaya senior economics lecturer Goh Lim Thye agrees the Israel-Hamas conflict and other geopolitical tensions can dampen the ringgit.

“This results in risk aversion which causes investors to gravitate to safer assets over emerging market currencies like the ringgit.”

He added trade disruptions can arise from Malaysia’s Middle Eastern ties, potentially affecting the ringgit’s value.

“As an oil-exporter, Malaysia’s currency may fluctuate with oil price changes linked to Middle East tensions. Reduced foreign direct investment may also result from perceived regional risks,” he said.

To shield the ringgit from geopolitical tensions, Goh said Malaysia can bolster its foreign exchange reserves for currency stabilisation, diversify trade partners to minimise regional risks, and uphold stable economic policies for resilience against shocks.

Yeah noted the impact from the Middle East conflict will be indirect as it has triggered a “risk off” sentiment by investors to continue investing in safe haven assets like the US dollar or other hard currencies.

Williams said “controlling the exchange rate” is not really an option for Malaysia as it is in Singapore and Hong Kong, and it has to allow the exchange rate to act as a shock absorber or automatic stabiliser.

“To strengthen the ringgit, the only real thing is to clarify policy, endure market liquidity and maintain sound fiscal and monetary policy conditions to promote price stability and sustainable growth and investment.

“These are the lessons to be learned from the past,” he added.