What are the Consequences of Lowering the Interest Rate by the Fed?
Cheaper USD: Lower interest rates in the U. S. make holding USD less attractive for investors who are in the lookout for high returns. This can cause the USD to lose value against other currencies, or in other words, devalue.
Capital Flows: This may cause investors to look for higher returns in other regions, for instance, emerging markets, hence pumping in more capital in currencies like MYR or SGD. This generally supports these currencies.
Interest Rate Differentials: A rate cut increases the differential between the U. S. and other countries’ interest rates. If BNM or MAS keeps its current rates, MYR and SGD could appreciate against the USD if it weakens.
Effect on Malaysian Ringgit (MYR)
The MYR is very volatile and responds to changes in external environment particularly the actions of the Fed. Here’s what can happen:
MYR Strengthens: If the Fed lowers rates and BNM remains unchanged, investors may prefer Malaysian assets because of the higher yields, increasing demand for MYR. This will probably help to boost the Ringgit in relation to USD.
Capital Inflows: Malaysia is an emerging market and therefore the availability of foreign capital could be of advantage especially as investors look for better returns outside the U. S.
Commodity Prices: Malaysia is a commodity exporter (palm oil, petroleum), therefore, depreciation of USD may lead to increased prices of commodities which will be positive for the Malaysian economy.
But if global uncertainty persists, investors may continue to seek safe-haven in the USD, which will cap MYR’s appreciation.
Effect on Singapore Dollar (SGD)
The SGD is less sensitive to Fed rate changes and less volatile than the MYR because of Singapore’s robust financial structure. However:
SGD Strengthens Slightly: The SGD could also strengthen against a depreciating USD, although the MAS tends to keep its currency’s exchange rate relatively stable.
Inflation Concerns: A higher SGD can assist Singapore to import goods at a cheaper price thus reducing inflation.
Although the impact may not be as significant as that of MYR, it would still appreciate relative to the USD in the short run.
Inflation Concerns: A higher SGD can assist Singapore to import goods at a cheaper price hence reducing inflation.
Though it may not be as drastic as the MYR, it would still appreciate relative to the USD in the short run.
When Is the Best Time to Buy USD?
Ahead of Expected Fed Rate Hikes: If the Fed has intentions of raising the rates again, it would be wise to purchase USD before the rate hike since higher rates are usually associated with a stronger USD.
During a Fed Rate Cut Cycle: If the Fed is lowering rates, then the USD may weaken. This is generally not the right time to purchase USD as it is costlier in local markets. However, if you expect a future recovery in the U. S. economy, you may purchase during the low.
Monitoring Domestic Rates: Pay particular attention to how BNM or MAS changes its rates. If they announce rate increases while the Fed is paring back, this could be the perfect time to accumulate USD because the currencies will likely depreciate against the greenback in the future.
Fed rate cut normally has a negative impact on the USD and this would mean that the MYR and SGD could strengthen. If you are planning to purchase USD, then the best time would be before any possible rate hikes by the Fed. But in a rate-cutting scenario, it might be better to wait unless you are trying to play a long-term USD weakness.
