Malaysia's Ringgit strength and global economic shifts

[MALAYSIA] The recent strengthening of the ringgit is often dismissed as merely a consequence of a weaker US dollar — a perspective that fails to capture the broader dynamics at play, according to Kenanga Research.

In its latest report, the research house highlighted increasing foreign inflows into Malaysia’s capital markets, supported by Bank Negara’s consistent monetary policy, a persistent trade surplus, and a stable macroeconomic environment. Kenanga emphasised that global investors are not simply retreating from US assets, but are actively reallocating capital toward reform-driven, credible markets — a shift driven by deeper structural changes in the global financial system.

Revising its year-end forecast for the ringgit from 4.45 to 4.08 against the greenback, Kenanga noted that what was once thought to be a slow-moving process of de-dollarisation is now unfolding over a much shorter horizon of two to three years.

To grasp the full implications of this trend, Kenanga stressed the importance of viewing it through the lens of history. The US dollar has long been the world’s dominant reserve currency, underpinning global trade and finance. But rising geopolitical tensions and evolving economic strategies are prompting many nations to reassess their reliance on the dollar — a trend gaining traction particularly in emerging markets with robust growth prospects and increasing financial resilience.

This marks a reorientation of global capital flows, revised reserve strategies, and a growing risk premium on US assets. While the US dollar is unlikely to lose its reserve status overnight, its previously unchallenged dominance is gradually diminishing. Kenanga described the shift as “quiet, persistent, and accelerating,” rather than abrupt or disruptive.

Over the past decade, central banks have been steadily diversifying away from the US dollar, a trend that gained momentum during Donald Trump’s presidency amid heightened geopolitical tensions and the increasing use of the dollar as a policy tool. By the end of 2024, the greenback’s share of global foreign exchange reserves had declined to 57.8%, down from 66% in early 2015, based on IMF data.

This diversification isn’t limited to official institutions. Private investors are also exploring alternative assets to hedge against dollar-related risks. Demand for gold has surged, reaffirming its role as a safe-haven asset, while the growing prominence of cryptocurrencies like bitcoin is reshaping the global investment landscape by offering new alternatives beyond traditional fiat currencies.

Kenanga observed that this shift is strategic, with central banks in countries such as China, Turkey, and India significantly ramping up gold purchases. Even after accounting for valuation effects from rising bullion prices, the underlying trend remains clear.

Turning back to Malaysia, Kenanga noted that the country’s economic fundamentals are gradually improving. Structural reforms, a focus on sustainable development, and regulatory enhancements have strengthened Malaysia’s appeal to investors. This outlook is further reinforced by the country’s strong trade ties and its strategic location within ASEAN.

In an era where US dollar dominance is receding, the ringgit could emerge as a quiet beneficiary. While exporters may lament a stronger currency, the solution lies not in depreciation, but in improving competitiveness.

Under the New Industrial Master Plan 2030, Malaysia is targeting a move up the value chain, with product sophistication identified as a key driver of that transition.

Kenanga now expects the ringgit to appreciate further, potentially reaching 3.95 against the US dollar by end-2026, assuming the US continues to underprice fiscal risks and Malaysia maintains its reform trajectory.

“If the US Federal Reserve begins easing later this year while Bank Negara remains steady, Malaysia could offer a rare mix of monetary stability and attractive yields in a fragmented global economy,” the firm noted.

This underscores the critical role of Bank Negara in steering the country through shifting global currents. By maintaining steady interest rates and focusing on long-term stability, Malaysia may position itself as a haven for investors seeking certainty amid global volatility.

However, Kenanga cautioned that the ringgit's upward momentum could face competition from alternative assets, including gold and cryptocurrencies like bitcoin, which continue to attract capital amid growing concerns over traditional currency systems.