Drop in ringgit compared to US dollar worrying, says expert

SHAH ALAM - Economists has expressed their concerns over the drop of ringgit, which traded at RM4.29 against the US dollar when the market closed on Thursday.

Bank Islam Malaysia Bhdd Chief Economic Analyst said the ringgit was currently undervalued and weakening as the US Federal Reserve (FED) expected to accelerate its federal interest rate hike to curb inflation.

He said the sentiment was expected to cause the ringgit to continue to fluctuate in a small range as market players awaited the FED's decision in its meeting on May 3 and 4.

"In my opinion, the drop of ringgit is due to external factors because in recent weeks we have heard a lot from members of the US Federal Open Market Committee (FOMC) who proposed a more aggressive interest rate hike.

"Recently, US FOMC member James Bullard envisioned an interest rate increase of 75 basis points as the country's economy recorded great growth and high inflation," he said when contacted by Sinar on Friday.

Mohd Afzanizam said the ringgit had recorded a declining trend since last year after there was a talk of interest rate hike in the US.

“This sentiment peaked at the FOMC meeting in March when the Fed raised their interest rates by 25 basis points.

“This interest rate is administered by the central bank. In Malaysia, we call it the overnight policy rate (OPR). These interest rates will usually be increased when the economy shows a strong sign of recovery,” he said.

He, however, said it was not impossible for the ringgit to rise before and after the FOMC meeting.

He said the increase in policy rates enforced by other central banks including the Bank of England, Bank of Canada and the European Central Bank which the increase in interest rate is also a factor influencing such volatility.

“That is why the sentiment towards the ringgit is as such although our country is still in good shape because our economic growth still runs smoothly.

"The ringgit is undervalued if we look at the nominal effective exchange rate and the effective exchange rate where both indices hover below the 100-point level," he said.

He said the value of the ringgit should reflect the country's economic position but for now, market sentiment were more focused on what is happening in the US.