Ringgit to remain weak as forex reserves drop

The Malaysian currency is expected to remain weak due to potential outflow of foreign capital due to the volatility caused by the Eurozone crisis, said RHB Research Institute today. The research house said that the ringgit depreciated by 4.6 per cent against the US dollar in May as compared with a gain of 1.1 per cent in April in line with a drop in foreign exchange reserves as investors turned risk averse and reduced their exposure to Asian assets. Malaysia’s foreign exchange reserves declined by US$0.1 billion or RM0.3 billion in the second half of May to US$136 billion (RM417 billion), after growing by US$0.2 billion or RM0.6 billion in the first half of May.

“In the short term, we expect the ringgit to remain weak given the high foreign holding of MGS (Malaysian Government Securities) and money market funds in the country,” said RHB.

It added that any sharp reversal of short term capital could cause ringgit to weaken further, although without the outflow of short-term capital, it is fundamentally supported at around RM3.00/US$ due to a sustained large current account surplus in the country’s balance of payments.

The ringgit managed to appreciate slightly against the US dollar in the first week of June however in tandem with other regional currencies. It rose 0.4 per cent against the US dollar as compared with the Singapore dollar, Indonesian rupiah and Thai baht which rose 0.8 per cent, 0.6 per cent and 1.1 per cent respectively.

RHB said that the drop in foreign exchange was due to outflow of foreign portfolio funds but was mitigated to some extent by the repatriation of export proceeds by Malaysian companies.

The ringgit rose slightly today against the US dollar, edging up to 3.16 from 3.17 yesterday.

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