Ringgit rises after US credit rating downgrade

[MALAYSIA] The ringgit opened stronger against the US dollar this morning, buoyed by Moody’s Ratings’ recent downgrade of the United States’ sovereign credit rating due to mounting concerns over rising national debt levels. As of 8.03 am, the local currency rose to 4.2850/3140 against the greenback, improving from last Friday’s close of 4.2900/2980.

Moody’s action echoes a similar move by Fitch Ratings in August 2023, both citing worsening fiscal conditions and governance challenges. This marks only the second occasion in over a decade that a major credit agency has downgraded the US from its coveted AAA rating, raising alarm over the sustainability of America’s fiscal direction. Analysts caution that while such developments may inject volatility into financial markets, the US dollar's entrenched role in global trade and finance could cushion immediate repercussions.

Last Friday, Moody’s lowered the US credit rating by one notch from AAA to Aa1. Commenting on the downgrade, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the decision largely stemmed from expectations of a widening fiscal deficit and escalating federal debt.

“The US federal debt-to-GDP ratio has exceeded 120%, a threshold historically associated with elevated economic risks,” he said. “Although the depth of US capital markets and its monetary policy flexibility offer some resilience, structural fiscal imbalances remain a persistent concern for investors.”

He added that Moody’s continues to recognise the US dollar’s status as the world’s primary reserve currency. "In the short term, the US Dollar Index (DXY) may see a pullback due to the downgrade,” he told Bernama, suggesting that this could provide a window of strength for the ringgit and other emerging market currencies.

Market participants are also eyeing the US Federal Reserve’s next policy move, with growing speculation that rate hikes may be paused amid moderating inflation. A dovish shift by the Fed could weaken the greenback further, enhancing sentiment towards emerging market currencies.

At the same time, the ringgit traded mixed against major global currencies in early trade. The local unit gained against the euro to 4.7495/8269 from 4.8022/8112 last Friday but eased versus the British pound to 5.7020/7406 from 5.7018/7125. It also dipped slightly against the Japanese yen to 2.9509/9711 from 2.9470/9527 previously.

This mixed trend highlights the complex interplay of global macroeconomic factors. While optimism over a dovish Fed stance supported the euro, fluctuations in the yen were attributed to ongoing speculation around the Bank of Japan’s potential departure from ultra-loose monetary policy—a shift that could redefine regional currency markets.

Against regional peers, the ringgit showed a broadly stronger performance. It advanced against the Singapore dollar to 3.3010/3236 from 3.3041/3105, gained on the Philippine peso to 7.70/7.75 from 7.71/7.73, and firmed against the Indonesian rupiah to 260.5/262.4 from 260.8/261.5. However, it slipped slightly against the Thai baht to 12.9024/13.0026 from 12.9003/9318 at the previous close.