The ringgit is likely to test the 2.80 level against the US dollar by year-end amid the uptick in the Asian bond yield and rising economic optimism.
Affin Investment Bank head of retail research, Dr Nazri Khan, said the ringgit's advances were due to the inflow of 'hot money' following the improvement in the US economy and the Federal Reserve's quantitative easing strategy.
"The ringgit may likely target the 3.00 level in near term with expectations of more foreigners investing in fixed income and government bonds.
"On the technical front, the ringgit appears to be breaking out from a bullish technical pattern with rising stochastic oscillators suggesting the start of a new bullish trend towards 3.0300 in the near term, 3.0000 in the medium term and 2.8000 by year-end," he said.
He said last Thursday, the local unit rose to almost 14-year high against the US dollar to 3.0520/0560 as concerns over Europe's debt crisis eased.
"This helped to boost investor appetite for riskier emerging-market assets.
"The last time the ringgit hit the 3.0750 level was in Oct 9, 1997," he said.
Going forward, Nazri said, the ringgit was likely to stay firm, mainly due to stronger commodity prices, improving local corporate earnings, positive economic fundamentals driven by the Economic Transformation Programme and the inflow of 'hot money'.
"The weak dollar policy and positive interest rate differential are also likely to work in the ringgit's favour," he said.
Bank Negara Malaysia will meet on Jan 27, 2010 to set its policy rate after raising borrowing costs three times last year.
Interest-rate increases were helping Asian currencies and these would continue for the next three months, he said.
"We noted that carry trade play is likely to be stronger with European markets making one of the best rebounds last week.
"The local economic recovery is also likely to outpace that of US, Europe, Japan and even the UK, which would see the ringgit strengthening against those currencies," he said.
Nazri said rising inflation and talks of capital controls in Asia may be negative factors for the ringgit.
"We, however, see them as negligible and remote factor to influence traders' sentiment," he said.
Meanwhile, Malaysia Rating Corp Bhd expected an increase in the bond issuance in 2011 to finance the government's fiscal deficit and to refinance maturing debts.
It expected the gross issuance to be between RM85.5 billion and RM87.5 billion.
"The government is likely to tap the retail market, replicating the success of its past savings bond issuance and in light of its announcement that the bond market will be opened to retail investors," it said.