US downgrade may spark strong ringgit rally

KUALA LUMPUR: The sovereign downgrade of the US by one notch to AA+ could lead to a strong rally of the ringgit against the greenback again this year said economists.

Upside risks towards the appreciation of the ringgit have risen which could impact the competitiveness of Malaysian exports still affected by the weak demand for electrical and electronic products.

The ringgit which opened at at 2.9990/0025 versus the US dollar yesterday, traded at 3.0170/0210 at 5pm against the US dollar from 3.0091/0140 on Friday

AmResearch, which also expects the biggest impact of the first downgrade by Standard & Poor's in 70 years, to be in the currency market, pushing the ringgit towards the RM2.93 level again.

"In the meantime, if there is a third quantitative easing, this could lead to an appreciation of the regional currencies, which could lead the ringgit to rally towards RM2.90 per dollar before settling between the RM2.80-RM2.90 range for 2011," said AmResearch director of research Manokaran Mottain.

Local rating agency RAM Holdings Bhd expects the currency to fluctuate at around RM2.90- 2.95 to the dollar for the remainder of the year.

But the upside risks have increased and thse includes a loss of confidence in the US dollar or US-centric assets which may prompt some capital flight from the US.

Jason Fong, economist with RAM, explained that if the financial volatility in the US turns out to be very significant, the impact on its external markets such as Malaysia can be substantial.

"One of the worse case scenarios would entail extensive capital flight from US-centric assets. In this scenario, there would be considerable decline in the value of the US dollar, causing an appreciation of US-denominated assets, particularly in commodities."

The US financial volatility may cause investors to put their money in safe haven assets, such as precious metals like gold.

As such, immediate domestic "paper wealth losses" should be expected in this scenario, the impact of which can flow onto borrowing costs, he warned.

The Malaysian Rating Corporation said the weak-appetite for US denominated assets will likely increase inflows of hot money into Malaysian shores as foreigners find holding Malaysian Government Securities more appealing.