US rate hike likely to weaken ringgit further

PETALING JAYA: The decision by the US Federal Reserve to hike interest rates by 25 basis points on Wednesday, with another three potential hikes in 2017, is likely to continue to strengthen the dollar, driving the ringgit lower.

The policy-setting Federal Open Market Committee (FOMC) voted unanimously to increase the key federal funds rate to a range of 0.5% to 0.75%.

The ringgit fell to 4.465 against the dollar following the announcement out of the US, in line with other regional currencies like the Singapore dollar, Thai baht, Indonesian rupiah, Korean won and Philippines peso.

Hong Leong Investment Bank (HLIB) said in a note yesterday, it expects a continued weakening bias of the ringgit against the dollar, even though it is likely to be partly mitigated by Bank Negara’s recent measures to stabilise the local note.

The research firm maintained its expectation of the ringgit to trading between RM4.20-RM4.50 against the dollar towards the end-2016 and RM4.10-RM4.40 in 2017.

The local stock market also eased in line with regional markets of Singapore, Indonesia and Thailand, closing 6.3 points lower to 1,636.99 points.

HLIB said the FOMC statement was less dovish as it expects slightly faster economic growth and headline inflation, leading it to raise its interest rate forecast gradually.

However, the Fed also noted that the risk appeared “roughly balanced” and emphasised that future moves will be data-dependent.

Notwithstanding the improvement in most economic data and expectations of sizeable fiscal stimulus under the new President-elect Donald Trump, HLIB opined that optimism will moderate in early 2017 due to – winter season leading to slower economic activities; higher interest rates presaging lower housing affordability and strong USD weighing on corporates’ profitability.

Meanwhile, productivity growth continued to moderate as businesses have yet to increase capital spending while ageing population remains an issue.

Given the moderate increase in growth projections amid external uncertainties, HLIB maintains its expectations for FOMC to have two rate hikes in 2017.

MIDF Research concurred with the supposition of two rate hikes by the Fed next year, mostly due to the uncertainties in the global economic condition, particularly the multiple elections to be held in the Euro area next year.

It said rise in right-wing movement and possibility of more countries wanting to exit the European Union could possibly hold the Fed back from being too rigorous with its normalisation process.