Emerging Asian currencies fell on Thursday, with the Malaysian ringgit plumbing to its lowest in over two decades, as the dollar strengthened after the US Federal Reserve flagged rates could rise further than expected, in contrast to expectations.
The ringgit fell 0.2% to its lowest level since January 1998.
The country’s central bank, Bank Negara Malaysia (BNM), raised interest rates for the fourth straight meeting, by 25 basis points (bps), as it seeks to quell inflation.
“The (BNM’s) policy rate hike was in the price and the bank’s statement is arguably a tad less hawkish. This shall support our view that front-end government bond yields shall be capped,” said Frances Cheung, rates strategist at OCBC.
However, Christopher Wong, currency strategist at OCBC, said there would be no let up in pressure on the ringgit.
“The sharp decline in the Chinese yuan, still-persistent USD strength, higher US rates, slower BNM tightening cycle and election uncertainties could continue to keep the ringgit pressured in the near term,” said Wong.
The US dollar index rose 0.3%, weighing on the currencies in the region. The Philippine Peso fell 0.8%, followed by the South Korean won , which fell 0.5%. The Indonesian rupiah fell 0.2%.
Asian FX, stocks rise as Fed policy decision looms large
The Fed raised rate by 75 bps, as expected, on Wednesday, and investors were hoping for signals of smaller hikes down the line.
Instead, Chair Jerome Powell said there was “some ground to cover” for the target federal funds rate to reach a “sufficiently restrictive” level that will slow inflation.
“We note that markets were already pricing in higher terminal rates relative to earlier Fed expectations, so a broader rout among Asian FX may still be less likely at this point,” Maybank analysts said in a note.
Stocks in the region fell, tracking losses on Wall Street overnight, as Powell’s comments shattered the rising optimism that smaller rate hikes may be on the horizon.
The Philippines equity markets led regional losses, falling 1.4%.
Stocks shed 2% in Singapore, 1.8% in Malaysia and 0.2% in Thailand.
The Philippine central bank signalled it planned a 75-bps rate hike later this month to match the Fed. UOB analysts expect the bank to remain in lockstep with the Fed until the first quarter of 2023, before taking a pause.
Highlights:
** Indonesian 10-year benchmark yields fall 4.3 basis points to 7.412%
** Hong Kong c.bank raises interest rate by 75bps after Fed, warns of borrowing risks