What we have seen with the ringgit-dollar rate in 2024 is a combination of factors.
First, news and market reactions to geopolitical issues outside of the control of Malaysian policymakers, including conflicts in the Middle East and Ukraine, and the US election.
Second, the intervention by Bank Negara Malaysia (BNM) to encourage repatriation of funds which significantly strengthened the ringgit for a short period.
Third, the change in the US Federal Reserve rates cycle ending months of speculation on when the rate cutting would come.
These caused volatility in the market with a 52-week range of RM4.09-RM4.98 to the dollar. From January to August the ringgit was never below RM4.58 and following the BNM intervention it was consistently below RM4.50.
Now we are seeing a correction due to normal market activity. The peak RM4.98 level we saw earlier in the year clearly undervalued the ringgit but the trough below RM4.10 at the end of September was equally unreasonable.
The ringgit is now just above a more sustainable range of RM4.20-RM4.40 to the dollar based on fundamentals and the historical average. We can expect the ringgit to remain within this range unless there are major shocks.
External factors will always matter especially in the US but for now the external environment is improving and the domestic policy agenda is good.
Market sentiment has already reacted to the incoming US President Donald Trump and his opening negotiation stance on trade, renewed tariffs on China and domestic policy.
Trump’s policies have historically affected emerging markets and a renewed tariff hike on China could bring opportunities for currencies like the ringgit.
Given the current strong domestic fundamentals and a likely calming of geopolitical tensions it is better to tone down intervention and insistence on active exchange rate policy.
The approach by BNM to encourage repatriation of funds from Malaysian firms overseas helped strengthen the ringgit and should be maintained but on a much more conservative basis. Ensuring liquidity and confidence in the ringgit market is more important now rather than active policy.
In Malaysia the decision by BNM to hold the OPR at 3% throughout the year was expected and it is the right decision.
Headline inflation will be around 2% for the year at the low end of the forecasts. Economic growth will be around 5% at the high end of the forecast and the financial system is sound.
The Trump presidency will be good for global trade and investment and Malaysia should benefit from that. It will reduce the global headwinds of the last two years.
The ringgit has strengthened but is subject to volatility due to international events which are outside the control of Malaysian policymakers. Nonetheless BNM can make policy intervention other than changing interest rates to manage that.
So the economy is in good shape and there is no need to change monetary policy for the foreseeable future.
It provides a stable policy environment which is good for attracting foreign and domestic investment.
BNM will manage the ringgit through market intervention by buying and selling ringgit, creating liquidity and encouraging repatriation of overseas profits by Malaysian companies.
In the long-term it will be structural reforms to raise incomes, improve the investment climate, maintain fiscal responsibility, rationalise subsidies and support sustainable growth that will determine the exchange rate and in 2025 policymakers should continue with the structural reforms necessary to achieve this.
The views expressed are those of the writer and do not necessarily reflect those of FMT.