Bank Negara Malaysia (BNM) said the current weakness in the ringgit is due to cyclical factors with an aggressive 525 basis point rate hike by the Federal Reserve (Fed) throughout 2022 to 2023.
This situation encourages the rise of the US dollar currency following strong demand.
In addition, geopolitical conflicts also caused investors to choose to hold the US dollar longer as a safe asset.
Meanwhile, China's weak economic growth prospects also affected investment sentiment in the region.
The central bank also added that Malaysia's economic fundamentals remain strong and the local unit is now undervalued against the US dollar. In their report, they expect the pressure on the ringgit to ease in the near future.
They also encourage wider use of the local currency when settling export or import payments either through the Local Currency Settlement Framework or regular correspondent banking channels to reduce dependence on the US dollar.
BNM also stated that the ringgit's prospects are linked to Putrajaya's structural reform efforts to ensure fiscal sustainability, new growth areas, increased growth potential and labor competitiveness.
Success in the implementation of the announced and proposed reforms should bring more investment flows to Malaysia and thereby provide more lasting support for the ringgit in the long term.
From an operational perspective, Bank Negara said its foreign exchange operations provide the necessary support to smooth out excessive volatility in ringgit exchange rate movements.
