The Malaysian ringgit fell to its lowest level since the Asian Financial Crisis as the currency was weighed down by the nation’s widening rate differential with the US.
(Bloomberg) — The Malaysian ringgit fell to its lowest level since the Asian Financial Crisis as the currency was weighed down by the nation’s widening rate differential with the US.
The currency dropped as much as 0.5% to 4.7703 per dollar, the weakest since 1998. It’s the worst performer in Asia this year after the yen.
The latest bout of losses come as the dollar gains on haven demand amid concerns over the Israel-Hamas war and on hawkish Federal Reserve bets due to strong US data. The Southeast Asian country also posted seven straight months of decline in exports through September, partly due to a slowdown in China, its largest trading partner.
Bank Negara Malaysia’s decision to pause interest-rate hikes at 3% since July is also adding headwinds for the currency. That’s put the local overnight policy rate at a record discount relative to the upper bound of the Fed fund rate, making it less attractive for dollar-based investors to buy ringgit-denominated assets.
Moreover, as Malaysia’s August price growth picked up to 2%, the nation’s inflation-adjusted rate spread stands at 1%. The government is also seeking to roll back blanket fuel subsidies, which may fan inflationary pressures and erode the rate spread.
Bank Indonesia’s surprise rate hike on Thursday is an example of growing angst among policymakers over currency weakness due to higher-for-longer Fed bets. The move also raised the attractiveness of the rupiah by taking the policy rate 50 basis points above the upper bound Fed fund rate.
Ringgit underperformance has been due to “real rate spreads that could turn a lot more unfavorable, especially as the subsidy rollback hits inflation and reveals softer real policy rates,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. Policymakers face a tradeoff between economic headwinds from higher rates and endangering macro and ringgit stability by not responding to these risks, he added.
(Updates with Indonesia’s rate decision in 6th paragraph.)
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