The United States (US) reached a millions positive Covid-19 cases, halting their economy and causing millions of people to lose their jobs. Despite these challenges, the US Dollar is still strong.
The US Dollar (USD) has been viewed as the safest currency to invest in, gaining 6 % from its lowest point in early March, according to the US Dollar Index. This is due to its privileged position as the world’s reserve currency, so in times of crisis investors want to put their money in safe havens, even if the US economy is in trouble as well.
Reasons the US Dollar is still strong
- US is considered largely politically and economically stable. The US Dollar’s value isn’t likely to drastically fluctuate like the Turkish Lira and Argentinian Peso have done before.
- According to Global Head of Foreign Exchange Strategy at Societe Generale, Kit Juckes, you can print Dollars without it weakening.
- The need for cash by companies who have seen the crisis drain their revenues.
- The currency is also the most traded in the world on the foreign exchange market. with more than $1.8 trillion of the greenbacks now in circulation around the world.
- Drastic fall in oil prices have helped the US Dollar appreciate against the Russian Ruble, Canadian Dollar, and Norweigan Krone, economies all deeply reliant on petroleum.
“Demand for greenbacks is particularly high in emerging markets saddled with dollar-denominated debt but not all of them can get themselves out of trouble easily,” said Kit Juckes.
Some observers believe the crisis caused by the Covid-19 can change the situation dealt by China and US thus jeopardizing the dollar’s position.
Investors have been betting that the global recession will be worse than the US downturn and other countries won’t emerge as quickly as the US.
The situation with Malaysian Ringgit
As of May 5, the Malaysian Ringgit was flat against the US Dollar as traders opted to stay on the sidelines, admist unfavourable economic data coming out from both Malaysia and the United States.
The Malaysian Ringgit has navigated the virus outbreak and a slump in crude prices with a measure of resilience. But, its fortunes may soon reverse.
A weaker Ringgit could undermine confidence and pose a test to Prime Minister Tan Sri Dato’ Muhyiddin Yassin, who is seeking to keep the economy afloat while consolidating power after the controversial exit of the former Prime Minister, Tun Dr Mahathir Mohamad.
Politics could be another challenge. PM Muhyiddin may face a confidence vote when parliament resumes in May 2020, with shifting alliances among lawmakers a risk to the new administration.
But, on a positive note, the Malaysian Ringgit could strengthen to 4.20 per US Dollar by year-end, according to the median forecast of seven economists surveyed by Bloomberg from March 20. This could be when oil prices recovered, with risks become lesser once global demand recovers.
Malaysia’s central bank, Bank Negara Malaysia (BNM), has as expected cut the Overnight Policy Rate (OPR) by 50 basis points with a possible further cut in 2020 2H. The OPR is the overnight interest rate set by BNM and is often a tool used by central banks to shape the economic narrative.
Reducing the OPR will reduce the cost of borrowing from banks and will affect both companies and individuals. The upcoming rate cut is largely expected to further improve the economy and will be the 3rd and 4th rate cut for Malaysia this year.
- Latest OPR Cut:
- May 5, 2020: -0.50%
- Upcoming OPR cut expected:
- 2020 2H: -0.25%
- Previous OPR changes:
- Mar 3, 2020: -0.25%
- Jan 22, 2020: -0.25%
- May 7, 2019: -0.25%
- Jan 25, 2018: +0.25%
- Jul 13, 2016: -0.25%
The US Dollar might be the safest currency in the world right now but in recent years, there have been calls for an alternative reserve currency other than US Dollar, from China to organizations like the United Nations but it’s hard to imagine any other currency as stable as the US Dollar.
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Share your thoughts on the current US Dollar and Ringgit situation in the comments section below.