Ringgit at firmest point against US$ in 9 months

Tags: carry trades | Global investors | immediate target | long-term target | low interest rates | Ringgit | SJ Securities Sdn Bhd | US dollar

Written by Chong Jin Hun
Thursday, 24 September 2009 00:23

KUALA LUMPUR: The ringgit traded at its strongest level in nine months against the US dollar on Sept 23 as the greenback weakened in anticipation that low interest rates in the world’s largest economy will spur more dollar-denominated loans for carry trades.

Analysts said the current emphasis was on carry trades where global investors would borrow in US dollars at almost zero cost, convert it into another currency, and park the money in a country which offers higher interest rates. This exerts further pressure on the greenback.

“Focus is increasingly shifting to currencies, to take advantage of the cheap dollar for funding carry trades, as risk appetite continues to rise in the midst of mounting evidence supporting the thesis of a recovering global economy,” SJ Securities Sdn Bhd wrote in a note.

The ringgit was traded at 3.4630 versus the US dollar as at 1.52pm. As the ringgit had breached the research house’s immediate target of 3.4700, its long-term target was revised to 3.4300.

Investors usually snap up the greenback as a safe haven asset in times of market uncertainty, hence adding to the value of the greenback.

However, an improving broader economic landscape will prompt investors to acquire riskier assets such as stocks and real estate in emerging markets in Asia.

US policymakers have kept the key interest rate at between zero and 0.25% since last December, and the market is already pricing in the possibility that the cost of funds will be raised next year if inflation threatens to surge.

The US dollar’s fall in Asia and Europe caught many traders by surprise, ahead of Sept 23’s US FOMC meeting which was expected to maintain the key interest rate.

Investors will be paying attention to the FOMC statement about the state of the economy as well as any hint on exit strategies.

Fresh year-highs were achieved by the euro, Swiss franc and New Zealand dollar against the greenback.

While the threat of inflation has subsided for now, market sentiment indicates that consumer prices could rise next year, spurred by government spending and debt, along with the printing of more money, a move known as quantitative easing.

Central banks in the US and UK, for example, have resorted to quantitative easing when low interest rates proved to be an ineffective tool in boosting domestic demand. A larger supply of US dollar and pound sterling in the market will weaken both currencies.

Against other currencies, the ringgit however traded at its weakest point in 15 months against the New Zealand dollar at 2.5154 at 1.58pm on Sept 23, amid a firmer New Zealand dollar in anticipation that policymakers there will raise lending rates.

This followed news that the South Pacific nation’s economy grew less than 0.1% in the second quarter to June, snapping five consecutive quarters of contraction, according to updates by Statistics New Zealand.

The ringgit, meanwhile, strengthened to 5.1294 versus the euro, 0.038172 against the yen, and 2.4587 to the Singapore dollar.

A weaker US dollar raises the spectre of costlier commodities such as crude oil and gold, helped by demand for these items as a hedge against inflation.

Crude oil for November delivery stood at US$71.43 a barrel at 2.17pm, down 33 cents from a day earlier but more than double the US$33.98 a barrel seen last February.

Spot gold rates, meanwhile, rose to as high as US$1,019.03 an ounce at 7.25am, before trading lower at US$1,014.80 at 2.30pm.