The ringgit yesterday weakened to a three-year low in sharp volatility following Fitch Rating's downgrade on the rating outlook for Malaysia.
It closed at 3.2425/2455 against the US dollar at 5pm yesterday, the lowest since June 2010 from Tuesday's close at 3.2240/2270.
According to AmResearch Sdn Bhd, the ringgit has been leading the pack of Southeast Asian currencies, ex-Singapore dollar, on the depreciating trend against the US dollar since May 22.
The ringgit depreciated by 6.75 per cent and ranks as the worst performing currency against the greenback, hit by a series of cyclical and structural bad news at times of strong US dollar environment.
"Risk of twin-deficits, Bank Negara Malaysia's regulatory tightening are structural in nature but it gets magnified under cyclical emerging market selling on local Malaysian Government Securities, faltering China and regional economic growth as well as in an environment of US dollar strength," the firm said.
AmResearch expects the ringgit to see more volatility ahead and it does not discount the possibility of Bank Negara stabilising the ringgit from excessive volatility from time to time.
Alliance Research said the weakness cycle should come to an end in due course and the currency could reverse its trend by year-end.
"In July alone, the local currency fell by 2.2 per cent. Year-to-date, the spot return for the local currency is down by 6.0 per cent, making it the third worst-performing currency after Indian rupee and Japanese yen.
"If the second quarter is to register a growth exceeding five per cent, the ringgit could be strengthen faster than expected," it said.
Alliance Research is projecting a 4.7 per cent growth for the second quarter.
The research house expects short-term volatility of the ringgit, but extending trading range from 3.15-3.25 per dollar to 3.20-3.30 per dollar over the next one to three months.
"Much depends on the outcome of FOMC meeting today. If the Fed decides to trim its quantitative easing progressively today, we will likely see the ringgit testing 3.30 level much sooner than expected.
"We expect a strengthening dollar soon, accompanied by markets conviction that the tapering off will occur as early as year-end," the firm noted.