Currency gains face fresh test

THE currency market is heading into the final stretch of the year with investors weighing a softer US dollar against still-resilient US growth and shifting global capital flows.

For Asian currencies, the next leg of gains is likely to depend as much on central-bank signals and domestic economic strength as on the direction of the greenback.

Kenanga Research maintains its year-end US dollar-ringgit forecast at 3.95, but cautions that a US Federal Reserve (Fed) pause by itself is unlikely to give the ringgit a lasting lift.

“Hawkish rhetoric without policy action failed to sustain US dollar gains after the July meeting, and we expect a similar pattern unless the September consumer price index forces a repricing,” it says.

The research house expects the US dollar to remain sensitive to incoming inflation and labour-market data, as well as oil prices.

At the same time, narrowing US growth exceptionalism and gradual diversification away from US assets are expected to keep medium-term pressure on the greenback.

That creates a more complicated backdrop for the ringgit.

While expectations of eventual US monetary easing can support emerging-market currencies, the Malaysian currency may need more than a Fed hold to establish a sustained upward trend.

“A September hold alone is unlikely to drive sustained ringgit appreciation,” Kenanga Research says.

“A hold that leaves the market pricing a higher-for-longer path still puts a firmer near-term floor under the US dollar.

“We would not chase ringgit strength on a hold headline alone,” it adds.

The implication is that investors may need to look beyond the headline decision and focus instead on what the US central bank signals about subsequent meetings.

A more dovish policy path could weaken the dollar and give the ringgit additional room to strengthen, while sticky inflation could keep US yields elevated and limit gains in Asian currencies.

Kenanga Research also expects Bank Negara Malaysia to keep policy steady, with the overnight policy rate kept at 2.75% through 2026 as underlying inflation remains contained and domestic demand stays resilient.

With current risks viewed as largely supply-driven, the central bank is expected to look through temporary energy-price movements unless these feed into broader and persistent second-round inflationary pressures.

“Nothing in Jackson Hole (Kansas City Fed’s annual economic symposium) changes that call,” Kenanga Research says, adding that the narrower breadth of US price pressure reinforces its view that the current global inflation impulse remains largely supply-driven.

The ringgit story is also closely tied to developments elsewhere in Asia, particularly China, where policymakers appear increasingly reluctant to let the yuan’s recent rally accelerate.

Policy speedbump

According to a Reuters report, China is slowing the yuan’s rise and is likely to keep further gains limited this year as authorities seek to support exporters.

The currency has gained nearly 9% against the US dollar over the past 20 months, reaching a 3.5-year high, but traders are increasingly seeing signs that policymakers want to temper the pace.

Falling market turnover, weaker exporter dollar selling and signals from the People’s Bank of China (PBoC) through its daily trading-band setting are among the indications that officials prefer a more stable currency.

Reuters says soft domestic demand and slowing lending and spending are also making a sharp yuan appreciation less attractive.

“I can’t see China allowing the yuan to strengthen really significantly against the US dollar, or any other currency,” Peter Berezin, chief global strategist at BCA Research, tells Reuters.

The consensus view is similarly cautious.

Reuters reports that the median forecast from a dozen global investment banks puts the yuan at around 6.68 per US dollar at year-end, only modestly stronger than its level of 6.72.

That reflects a balancing act for Beijing.

A stronger yuan can help improve purchasing power and reflects China’s huge trade surplus, but a stable currency also helps exporters preserve the value of their overseas earnings when converted into yuan.

Chaoping Zhu, global market strategist at JPMorgan Asset Management in Shanghai, tells Reuters that “the yuan is indeed undervalued”.

However, he adds that “it won’t be completely liberalised to follow factors such as the trade surplus” in the short term, given the priority of stabilising domestic growth and employment.

The policy signals are becoming clearer.

Reuters reports that the PBoC has been setting its trading-band midpoint at levels weaker than market expectations since November 2025, while major state-owned banks have repeatedly bought dollars in the onshore market.

HSBC analysts interpret the relatively steady fixing as evidence that “authorities are contented with a ‘balanced’ yuan”.

Still, a modestly stronger yuan remains possible if China’s export performance stays strong.

Morgan Stanley’s chief China economist Robin Xing says: “We believe the PBoC may allow a modest appreciation if export outperformance continues.

“But a sharp rise beyond the fundamentally supported level appears unlikely, the PBoC remains mindful of still-soft domestic demand and price dynamics.”

For regional currencies such as the ringgit, that points to a year-end landscape where a weaker US dollar can provide support, but domestic and regional policy considerations remain important.

The yuan’s managed advance may also limit the extent to which Asian currencies broadly appreciate in tandem, particularly if policymakers remain focused on protecting export competitiveness.

Macquarie’s chief China economist Larry Hu sums up the near-term dynamic simply: “We still expect 6.72 by end-2026.”

He says the key driver is likely to be US dollar strength, with the yuan following the global dollar cycle – appreciating when the dollar weakens and depreciating when it strengthens.