KUALA LUMPUR – The recent Federal Open Market Committee meeting has signalled that the Federal Reserve will not increase interest rates in 2021 but would encourage the US dollar to stay weaker in the coming quarters.
Juwai IQI chief economist Shan Saeed said more than 25% of all US dollars in circulation presently were printed over the past 12 months, as measured by M2.
“At the height of printing, the Fed was creating over US$425,000 (RM1.74 million) in new US currency per second, and it did that every second for nine straight weeks!” he told Bernama.
He said the US Commerce Department reported that gross domestic product (GDP) rose at a 6.4% annual rate in the first quarter from the fourth, continuing a rebound that economists believe began last May after the pandemic’s first wave in the US began to subside.
That left GDP 0.9% below the level it reached in the fourth quarter of 2019, before the crisis began, he said.
“Sometime within the next month or two, the US economy will be back to the level it was before the Covid-19 crisis struck, but the recovery of the sort the Fed is aiming for is still far away.
“Maybe investors should stop expecting it to blink before it gets there. With more stimulus money coming into the economy and the Biden administration’s obsession with modern monetary theory (MMT), the US dollar would see a declining trend in the next quarters,” he said.
Digital yuan set to also weaken dollar
He said the US dollar usually provokes strong feelings in the currency fraternity… it is either loved or hated.
“That is not the case now, which is remarkable. There may be a strong US dollar story.
“But there is no really strong story about the dollar. Another factor that would keep the dollar weaker is the advent of the digital yuan in the market, shifting investors’ focus on the yuan for their trade and commerce activities,” he added.
He said the People’s Bank of China is ready to roll-out digital yuan to facilitate Chinese entrepreneurs, Belt and Road Initiative traders and general investors globally. The yuan will enter the financial markets very strongly.
Impact on ringgit
Shan said the ringgit has so far shown resilience in the currency market, as Bank Negara Malaysia (BNM) has maintained the structural stability of the ringgit against the greenback.
With the overnight policy rate at 1.75%, BNM has sufficient room to manoeuvre in the coming quarters, he said.
“BNM would use tactical manoeuvring when required, otherwise the market-determined exchange rate would drive the fair value of the ringgit/US dollar.
“At Juwai IQI, we foresee the ringgit/US dollar fair value in the second quarter of 2021 to meander around 3.98 to 4.12, taking into account more stimulus amount coming into the market,” he added.
While for the full year, the ringgit is expected to trade between the 3.67 and 4.10 level against the US dollar, with the local currency maintaining its structural stability in the market in 2021-22, Shan said. – Bernama, May 1, 2021
