Ringgit up again

KUALA LUMPUR: The ringgit and a host of other currencies strengthened against the US dollar after US Federal Reserve chairman Ben Bernanke signalled interest rates would be kept at the current super low levels as the US economy had not yet recovered from the problems caused by its credit crisis.

Stock markets in Asia, however, were mixed at the close of trade yesterday but crude oil and gold rose after the Federal Open Market Committee (FOMC) meet and a historic first post-FOMC press conference by Bernanke who indicated that inflationary pressure was on the rise in the US and economic growth would probably be slower this year than earlier predicted.

“The ringgit is already reacting,” said RAM Holdings Bhd senior economist Kristina Fong.

The ringgit, which was at 2.96 against the US dollar at press time, climbed for the seventh straight day and has been the best performing currency among the major currencies in Asia over the past week.

Analysts have said the ringgit's attraction is not only the interest rate differential it enjoys with the US but also the much lower inflation rate compared with other countries in this region.

Gold rose US$4.75 an ounce to US$1,532.1 and Brent crude oil retraced gains earlier and was trading at US$125 a barrel for June delivery.

At the FOMC meet on Wednesday in the US, the Fed decided to leave interest rate unchanged at between 0% and 0.25% and will continue with its US$600bil quantitative easing programme that will end in June.

With Asian countries, including Malaysia, having the bias to raise rates, the widening interest rate differential and the quantitative easing the US is committed to would mean increased focus on emerging markets.

“There is a possible widening of interest rate differentials and that will indicate more capital inflows into the regional economies,” Fong said.

Stock markets reacted differently as analysts said investors were happy to note pro-growth policies would continue in the US but were wary over the sluggish growth forecast for this year.

The FTSE Bursa Malaysia Kuala Lumpur Composite Index closed up 5.39 points at 1,535.3,

The Fed in its meeting and the subsequent media briefing by Bernanke indicated it would initially not grow its balance sheet and re-invest proceeds from maturing securities once its ongoing quantitative easing concluded, which economists said was a clear hint monetary easing would eventually come to an end.

In a report yesterday, CIMB Research said the Fed had noted the upside risks to inflation given the headwinds from higher energy and food prices.

“It will monitor inflation and expectations for future prices closely but said so far, so good',” it said.

With the Fed saying “long term inflation expectations have remained stable and measures of underlying inflation have been subdued,” CIMB said that could suggest the Fed was in no rush to raise overnight interest rates from their existing near-zero levels.

“That said, the Fed upped its inflation estimate this year from 1.3% to 1.7% to 2.1% to 2.8%. Core inflation forecasts were tweaked up from 1.0% to 1.3% to 1.6%,” said CIMB Research.

On the direction of interest rates in the US, CIMB thinks the Fed is is no hurry to raise interest rates given its downbeat tone on the economic recovery.

“Even though inflation pressures have started to build up due to rising commodity prices and energy costs, it is not yet at a tipping point',” it said.

“The FOMC reaffirmed its current monetary policy stance of keeping the Fed funds rate exceptionally low for an extended period. As such, we now expect the Fed to keep the rates at 0.0% to 0.25% till year-end, a revision from 0.75% by end-2011.”(Source: The Star Online)