The ringgit and regional currencies will trend higher this year as governments weigh in on inflation versus the need for economic growth.
Economists have pointed out that the US dollar outlook for the year would be affected by the second round of quantitative easing announced last November as well as the economic prospects.
The ringgit yesterday hit a fresh high of 3.053 to the US dollar in morning trade before settling at 3.054, on expectations of a hike in the overnight policy rate (OPR), currently at 2.75%.
This outlook was heightened on the expection for higher inflation, as subsidies for fuel were reduced and food prices rose.
The greenback has also weakened against the yuan, falling by more than 0.40% this week after a 0.58% drop last week. This followed an interest rate hike by the People's Bank of China on Oct 19 on mounting inflation, which hit 5.1% in November compared with a year ago.
Currency traders told StarBiz that the outlook for the ringgit continued to be bullish in tandem with that of regional currencies especially with the unexpected 25-basis-point rate hike by the Bank of Korea and Thailand's 25-basis-point hike on Wednesday.
EON Bank Bhd currency trader D. Sivadass said the ringgit would strengthen in tandem with currencies in the region as governments focused on inflation brought on by higher commodity prices and funds flow as a result of tightening monetary policy.
Although he does not expect a hike in the OPR when the monetary policy committee meets on Jan 27, the argument for rate hikes has strengthened for Malaysia as well as the region's economies.
“While inflation is under control for the moment, overall interest rates are pointing up,” Sivadass said.
He said the ringgit would trade around the 3.05 level for the week and 3.03 next week, assuming current conditions remained the same.
AmResearch Sdn Bhd senior economist Manokaran Mottain said going by Bank Negara's recent statements, the current monetary policy would likely to be more focused on inflation than growth.
“Demand is now supporting growth with the economy expected to expand by 6% in the second half of the year, fuelled by projects under the Economic Transformation Programme,” he said.
However, Manokaran noted that along with the region, inflationary pressure had stepped up; therefore managing inflation would be the focus in the coming months.
He said the statutory reserve requirement (SRR), which is the amount of funds banks must set aside with the central bank against deposits and notes, could be looked into during the Jan 27 meeting.
“The SRR has been on the low side,” he said. In late November 2008, Bank Negara reduced the SRR by 50 basis points to 3.5% in response to the need to boost liquidity during the recession.
Nevertheless, Manokaran expects at least 50 basis points of OPR hikes this year with inflation at 3% by end-2011.
“I expect the ringgit to peak at 2.92 to the US dollar before coming down to 2.95 to 2.97 by year-end,” he said.
Meanwhile, OSK Investment Bank Bhd currency trader Godwin Chan said there could be an interest rate hike this month due to the inflation outlook.
“The likelihood of a rate hike is higher now and that will affect the US dollar/ringgit outlook, which will be bearish,” he said.
Chan expects the ringgit to trade against the greenback between 3.02 and 3.03 and maintained a 2.90-3.00 target to the end of the year.
“This level will reflect the true fundamentals of the currency,” he added.