Ringgit expected to weaken in short term on dollar strength

PETALING JAYA: The near-term positive outlook on the US dollar unfortunately spells weaker prospects for the ringgit going forward, as it will be influenced by the ongoing external headwinds, oil price volatility, strengthening dollar as well as domestic challenges such as politics, incoming macro data, corporate earnings and the ringgit-dollar liquidity.

In a report, AmBank Research said the dollar is expected to outperform its rivals, including the ringgit, in the near term given that it is the most liquid safe-haven currency.

“Much depends on another bout of risk aversion related to the Covid-19 crisis. News of fresh outbreaks in China’s Wuhan, South Korea, Germany, Singapore and Mexico are key events on our radar. Malaysia remains cautious on the risk of another bout,” it said.

Looking at the dollar’s individual performance, it has risen against all its major peers, including the ringgit.

The predominant subject of risk-on/risk-off has caused the ringgit-dollar exchange rate to fall by 5.8% to reach 4.33 as at May12. Other major currencies that fell against the dollar during the same period are the euro (3.2%), pound (7.5%), yuan (1.7%), Aussie dollar (7.8%) and Singapore dollar (5.4%).

Furthermore, although the dollar has pared some of its gains by 3.6% to 99.93 as at May 12, from the peak at 102.82 on March 20, the currency remains elevated due to a huge gap between expectations, economic realty and optimism of the investors on the speed and strength of the economic recovery in the second half of the year.

However, in the longer term, AmBank Research said the potential of the dollar strengthening will be limited, with more weakening pressure.

“This is, in part, due to the risk of a more severe and protracted global recession that has diminished. Global lockdowns and movement control order measures are slowly being relaxed.

“Another driver for a weaker dollar over the longer horizon will be from the impact of the US Fed’s aggressive move to combat the virus crisis by injecting a huge amount of dollars into both the domestic and global economy. While the unlimited (quantative easing) QE introduced by the Fed will provide some confidence in financial markets and support the dollar, the dollar will decline simply because the QE is too large for the dollar to ignore,” it said.

In addition, the research house pointed out that the macro and earnings disappointments which are expected to continue in the next few months will start easing, and once that happens, the focus will be on forward looking figures which would suggest a stronger and more durable recovery in 2021.

source https://www.thesundaily.my/business/ringgit-expected-to-weaken-in-short-term-on-dollar-strength-GE2420338