Ringgit strengthens on geopolitical risk—But it’s a hedge, not a rally

The ringgit opened the week slightly higher against the US dollar, a move that on the surface seems unremarkable. Yet in the context of deepening geopolitical tension—particularly in the Middle East—and shifting oil price dynamics, this modest rise reveals the strategic recalibration underway in regional FX markets.

The ringgit's performance has not been driven by fundamental economic resurgence or policy shifts. Instead, it reflects Malaysia’s structural positioning as both a commodity-linked economy and a secondary hedging destination within Southeast Asia. With Brent crude climbing and global investors displaying renewed risk aversion, capital flows are behaving defensively—treating the ringgit not as a growth bet, but as a partial buffer within a volatile energy corridor.

The core trigger lies beyond Malaysia’s borders. Escalating hostilities between Israel and Iran over the weekend raised alarms about potential disruption in oil supply, particularly through the Strait of Hormuz. Brent crude surged over 2%, with energy markets pricing in elevated geopolitical risk premiums. For Malaysia, this brings a double-edged signal: higher oil prices mean stronger export receipts, but also amplify regional exposure to volatility and FX pass-through inflation.

The ringgit’s slight strengthening suggests that market participants are treating it as a tactical beneficiary of higher oil—yet this is not accompanied by broader capital re-engagement. BNM (Bank Negara Malaysia) has maintained rate stability, offering no indication of intervention or reserve drawdown. There is, however, an implicit test underway: how much geopolitical tension can the ringgit absorb before the central bank needs to shift its monetary posture?

In prior periods of conflict-driven oil shocks—such as 2019 or mid-2022—the ringgit generally weakened, tracking both global risk aversion and rate divergence with the US. The present shift marks a departure. This time, the ringgit has found modest strength despite sustained dollar resilience and no clear monetary tightening from BNM. Why?

Part of the answer lies in Malaysia’s improving trade balance and fiscal stance. Although structural growth remains tepid, fiscal prudence and positive terms of trade offer short-term buffers. At the same time, regional investors appear to be re-weighting currency exposure based on geopolitical corridors rather than traditional inflation dynamics. The ringgit, while not a first-tier safe haven, is being treated as a middle-power currency with partial oil linkage—similar in function, if not scale, to the Norwegian krone.

Sovereign wealth funds and institutional allocators are likely viewing this moment through a risk-parity lens. The ringgit is being repositioned not as a long-term overweight but as a short-duration hedge—particularly in fixed-income instruments and short-term swaps. Cross-border fund flows show no signs of durable inflows into Malaysian equities or infrastructure projects. Instead, it’s FX and yield that are doing the work.

Notably, this behavior contrasts with BNM’s relatively neutral stance. While central banks in Indonesia and the Philippines have leaned into proactive rate defense, Malaysia has opted for stillness—perhaps intentionally. The lack of overt FX defense may be a quiet signal: that BNM prefers a slow rebalancing of capital posture over a rapid currency distortion driven by intervention.

This divergence in monetary posture is creating subtle but important signaling shifts in ASEAN. Indonesia’s rate hikes have clearly prioritized currency defense, while the Philippines is walking a tighter line between inflation control and capital retention. Singapore, operating under an exchange rate–centered monetary framework, has allowed the SGD to appreciate within its policy band.

Malaysia, by contrast, is allowing market signals to play out—testing the degree to which geopolitical hedging and commodity support can stabilize the ringgit without sacrificing interest rate neutrality. The result is a differentiated FX cycle within ASEAN—one that could widen further if the Middle East crisis deepens or global yields spike again.

The ringgit’s early-week gain is not a market misread. It reflects strategic hedging by sovereign and institutional players amid global realignment of risk. Malaysia’s external positioning—part oil exposure, part ASEAN intermediary—offers short-term utility in a capital landscape seeking partial decoupling from Western rate volatility.

Whether this posture is sustainable depends less on domestic fundamentals and more on BNM’s willingness to remain neutral while the region reprices for geopolitical risk. For now, the ringgit is not a bet on growth. It’s a hedge against disorder.