A stronger US dollar against the ringgit is seen for the next three to six months but after that, the outlook is less certain and hence, volatile.

       While the strength of the US economic recovery has to be sustained, tightening policies from other central banks and a potentially stronger global recovery might see the US dollar rally cooling off.

       The US dollar had rallied following the surprise shift in tone from the US Federal Reserve in terms of slowing down its massive bond purchases (used to stimulate markets) and possibly raise interest rates sooner than later.

       However, the US dollar rally momentum eased last week following mixed signals from the Fed on whether inflation is transitory, led to some profit taking on the strong gains in the previous week.

       The US dollar will likely strengthen over the next three to six months; the Fed is expected to begin tapering its US$120bil (RM498.72bil) monthly bond purchases in the third quarter and move into a gradual normalisation of short-term rates earlier than expected.

       “Dollar strength will likely squeeze the ringgit into a weakening path in the near term as investors remain wary of the macro conditions under the four-phase National Recovery Plan, ’’ said Socio Economic Research Centre executive director Lee Heng Guie.(pic below)

       Providing some support to the ringgit will be the strong trade surplus but net capital outflows will be a dominant factor dictating the movements of the ringgit.

       The ringgit may weaken against the US dollar due to the current lockdown and slightly more hawkish Fed.

       “But as we approach year-end, the ringgit may strengthen as we emerge from the Covid-19 lockdown, ’’ said Hong Leong Bank managing director, global markets, Hor Kwok Wai.

       Worldwide, the US dollar may strengthen in the near term; however, as economies emerge from Covid-19 or plan to move their rates higher, we could see some reversal with US dollar weakening before year-end.

       Against expectations for the Fed to shift to a more hawkish stand sooner than later, the ringgit level against the US dollar should stabilise and then weaken back towards 4.20-4.25 as the US dollar strengthens, said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.

       The ringgit closed at 4.16 against the US dollar last Friday.

       The 18 Fed officials are split over which is a bigger threat – a large jobs deficit which will require continuous stimulus, or possible inflation shock which may necessitate an earlier tightening in policy.

       Core personal consumption expenditures, the Fed’s preferred inflation measure, had gained 3.4% annually in May, representing the biggest increase in almost 30 years.

       In the near term, the US dollar should stay elevated as markets are preparing for any indication that the Fed might turn more hawkish.

       But the US dollar/ringgit exchange rate could be more volatile as we progress through the year, said Bank Islam Malaysia Bhd chief economist Afzanizam Abdul Rashid.(pic below)

       Financial markets are increasingly wary that the Fed, which believes that higher inflation in the near term may be transitory owing to bottlenecks, might have to change its tack should inflation become more pervasive.

       As the global recovery becomes stronger, following the sharp downfall last year, risk-on sentiment could set in, leading to the appreciation of emerging market exchange rates, said Afzanizam.

       There are factors supporting the ringgit.

       As the strong yuan continues to be a shelter for Asian currencies, US dollar strength is likely to be more reflected with the G10 group of industrial countries.

       Firm crude oil prices also provide some support for the ringgit which is not expected to see sustained impact from concerns over Covid-19 cases, movement restrictions and political uncertainties in Malaysia, said OCBC Bank Malaysia economist Terence Wu.

       In line with its core pro-US dollar view, OCBC Bank Malaysia expects the ringgit to settle at a higher range between 4.13 to 4.18 to the US dollar.

       “We are looking for US dollar strength in the second half, especially against the euro and yen, ’’ said Wu.

       Underlying factors for a positive US dollar run include rate hike expectations despite the Fed’s attempt to soften the message last week, while front-end, two-year G10/dollar yield differentials are moving in favour of the US dollar.

       US dollar strength may not be sustainable.

       “It has weak foundations and is premised on a technical oversold position where the short US dollar trade was the most widely participated and one-sided trade, ’’ said former Inter-Pacific Securities head of research Pong Teng Siew. (pic below)

       The swing to the other direction, of US dollar strengthening, was premised disproportionately, assuming that the low/near zero rate regime is about to end, due to a “volte-face” by Fed chairman Jay Powell.

       ‘’In fact, I think he will turn again on any hint of the recovery losing steam, ’’ said Pong.

       After an initial strong rebound in the US economy, a sense of foreboding has set in, that the damage to the economy may be more permanent than originally thought.

       Previously shut businesses in the US struggle to revive as they seem unable to recruit workers; there is a flood of liquidity but not enough demand for money for transactional purposes,

       That is strongly suggestive that a return to the pre Covid-19 days may be still way off!

       With so much uncertainty ahead, we have to brace ourselves and prepare for various possible scenarios.

       Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.