KUALA LUMPUR, Aug 26 — The Malaysian Institute of Economic Research (MIER) forecasts that the ringgit could strengthen to between 4.20 and 4.25 against the US dollar by the end of 2024, up from 4.59 at the close of 2023.

However, MIER cautioned that the persistent strength of the US dollar might keep the ringgit’s average exchange rate around 4.60-4.64, slightly above the 2023 average of 4.56.

MIER noted that the ringgit could benefit from more than just US monetary policy.

It said domestic factors, such as fiscal reforms aimed at reducing the budget deficit and strong GDP growth expected to reach, if not exceed, five per cent in 2024, could also support the currency.

"Solid foreign direct investment, repatriation of funds from government-linked companies, and a sustained current account surplus driven by robust exports in electronics, tourism and services further strengthen the outlook for the ringgit,” MIER stated in its July 2024 Monthly Economic Review, released today.

MIER highlighted that foreign investment in Malaysia’s equity and bond markets is another positive factor.

After an outflow of RM823.6 million earlier in the year, the equities market saw an inflow of RM1.3 billion in July. Meanwhile, foreign inflows into the bond market totalled RM874.6 million in the first half of 2024.

Despite the ringgit being undervalued, indicators such as the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) suggest its fair value lies between 3.90 and 4.20 against the US dollar.

MIER also noted rising expectations for a Federal Reserve rate cut in September, spurred by growing recession concerns following disappointing July employment data.

Market sentiment has shifted towards the possibility of a 50-basis-point rate cut in both September and November, potentially lowering the federal funds rate from its current range of 5.25 per cent to 5.50 per cent.

"A cumulative rate cut of 100 basis points in 2024 could reduce the interest rate differential between the US and Malaysia to 125-150 basis points, potentially benefiting the ringgit as investors seek to diversify their portfolios in search of higher returns,” MIER added. — Bernama