The Fed’s Pause and the Ringgit’s Dilemma: Navigating Global Capital Shifts
By Samirul Ariff Othman
The U.S. Federal Reserve’s decision to hold interest rates steady at 4.25%–4.50%, coupled with Jerome Powell’s message that there’s no rush to cut rates, has set off ripples that will be felt far beyond Washington. For Malaysia and its currency, the ringgit, this is more than just a technical policy move—it’s a shift in the gravitational pull of global capital, one that could shake investor sentiment, impact trade, and even nudge policy responses from Bank Negara Malaysia (BNM).
In the immediate term, the biggest challenge is the interest rate differential. With Malaysia’s Overnight Policy Rate (OPR) sitting at 3.00%, international investors looking for yield will likely pivot toward the U.S., where rates remain significantly higher. That means capital outflows from emerging markets like Malaysia, exerting downward pressure on the ringgit. And because markets move on perception as much as fundamentals, the Fed’s reluctance to signal a definitive rate-cutting path only fuels the dollar’s strength, making the MYR even more vulnerable. The psychology of markets is simple: if the Fed sounds cautious, investors grow defensive—and the safest place to be is the U.S. dollar.
In the midterm, the impact of a stronger dollar on Malaysia’s economy becomes more complex. On one hand, a weaker ringgit makes Malaysian exports cheaper and more competitive, potentially boosting trade. On the other hand, a depreciating currency also raises import costs, driving inflation higher—a headache for policymakers at BNM. If inflation picks up, pressure will mount for the central bank to raise rates, but doing so would risk slowing down domestic growth just as Malaysia is trying to build economic momentum. It’s a delicate balancing act, and one that policymakers will need to navigate carefully.
The long-term picture presents deeper structural challenges. If the ringgit remains under sustained pressure, foreign direct investment (FDI) could take a hit, as investors worry about currency volatility. A persistently weak ringgit would also make it more expensive for Malaysia to service its foreign-denominated debt, tightening financial conditions further. The silver lining is that BNM and Malaysia’s policymakers have tools to counteract these risks. Structural reforms aimed at diversifying the economy, attracting long-term investment, and enhancing productivity could provide lasting support to the currency. But reforms take time, and global markets don’t wait.
Of course, there are also unintended consequences. If capital keeps flowing out due to the U.S. rate advantage, Malaysia could face capital flight—an exodus of funds that could weaken the ringgit beyond what fundamentals dictate. Additionally, if Malaysia keeps rates too low in response to domestic economic concerns, the excess liquidity could fuel asset bubbles, particularly in real estate and equities, leading to financial instability down the line.
So what can Malaysia do? First, BNM could adjust its monetary policy to narrow the rate differential, preventing excessive outflows and supporting the ringgit. Second, policymakers need to double down on strengthening economic fundamentals—investing in key industries, boosting productivity, and fostering innovation to attract sustainable FDI. And finally, if volatility in the currency markets becomes too pronounced, BNM has the option of intervening directly to stabilize the ringgit.
At the end of the day, the Fed’s decisions aren’t made in a vacuum. When Powell speaks, the world listens, and when U.S. interest rates stay elevated, it reshapes capital flows across the globe. For Malaysia, this isn’t just about the ringgit—it’s about staying agile in a global financial system where one central bank’s pause can set off a storm somewhere else.
——————————————————————————-
Economist Samirul Ariff Othman is an adjunct lecturer at Universiti Teknologi Petronas, international relations analyst and a senior consultant with Global Asia Consulting. He did his graduate studies at Macquarie University in Sydney, Australia. The views in this OpEd piece are entirely his own.
The U.S. Federal Reserve’s decision to hold interest rates steady at 4.25%–4.50%, coupled with Jerome Powell’s message that there’s no rush to cut rates, has set off ripples that will be felt far beyond Washington. For Malaysia and its currency, the ringgit, this is more than just a technical policy move—it’s a shift in the gravitational pull of global capital, one that could shake investor sentiment, impact trade, and even nudge policy responses from Bank Negara Malaysia (BNM).
In the immediate term, the biggest challenge is the interest rate differential. With Malaysia’s Overnight Policy Rate (OPR) sitting at 3.00%, international investors looking for yield will likely pivot toward the U.S., where rates remain significantly higher. That means capital outflows from emerging markets like Malaysia, exerting downward pressure on the ringgit. And because markets move on perception as much as fundamentals, the Fed’s reluctance to signal a definitive rate-cutting path only fuels the dollar’s strength, making the MYR even more vulnerable. The psychology of markets is simple: if the Fed sounds cautious, investors grow defensive—and the safest place to be is the U.S. dollar.
In the midterm, the impact of a stronger dollar on Malaysia’s economy becomes more complex. On one hand, a weaker ringgit makes Malaysian exports cheaper and more competitive, potentially boosting trade. On the other hand, a depreciating currency also raises import costs, driving inflation higher—a headache for policymakers at BNM. If inflation picks up, pressure will mount for the central bank to raise rates, but doing so would risk slowing down domestic growth just as Malaysia is trying to build economic momentum. It’s a delicate balancing act, and one that policymakers will need to navigate carefully.
The long-term picture presents deeper structural challenges. If the ringgit remains under sustained pressure, foreign direct investment (FDI) could take a hit, as investors worry about currency volatility. A persistently weak ringgit would also make it more expensive for Malaysia to service its foreign-denominated debt, tightening financial conditions further. The silver lining is that BNM and Malaysia’s policymakers have tools to counteract these risks. Structural reforms aimed at diversifying the economy, attracting long-term investment, and enhancing productivity could provide lasting support to the currency. But reforms take time, and global markets don’t wait.
Of course, there are also unintended consequences. If capital keeps flowing out due to the U.S. rate advantage, Malaysia could face capital flight—an exodus of funds that could weaken the ringgit beyond what fundamentals dictate. Additionally, if Malaysia keeps rates too low in response to domestic economic concerns, the excess liquidity could fuel asset bubbles, particularly in real estate and equities, leading to financial instability down the line.
So what can Malaysia do? First, BNM could adjust its monetary policy to narrow the rate differential, preventing excessive outflows and supporting the ringgit. Second, policymakers need to double down on strengthening economic fundamentals—investing in key industries, boosting productivity, and fostering innovation to attract sustainable FDI. And finally, if volatility in the currency markets becomes too pronounced, BNM has the option of intervening directly to stabilize the ringgit.
At the end of the day, the Fed’s decisions aren’t made in a vacuum. When Powell speaks, the world listens, and when U.S. interest rates stay elevated, it reshapes capital flows across the globe. For Malaysia, this isn’t just about the ringgit—it’s about staying agile in a global financial system where one central bank’s pause can set off a storm somewhere else.
——————————————————————————-
Economist Samirul Ariff Othman is an adjunct lecturer at Universiti Teknologi Petronas, international relations analyst and a senior consultant with Global Asia Consulting. He did his graduate studies at Macquarie University in Sydney, Australia. The views in this OpEd piece are entirely his own.
The U.S. Federal Reserve’s decision to hold interest rates steady strengthens the dollar, pressures the ringgit, and forces Malaysia to balance capital outflows, inflation risks, and long-term economic resilience.
The U.S. Federal Reserve’s decision to hold interest rates steady at 4.25%–4.50%, coupled with Jerome Powell’s message that there’s no rush to cut rates, has set off ripples that will be felt far beyond Washington. For Malaysia and its currency, the ringgit, this is more than just a technical policy move—it’s a shift in the gravitational pull of global capital, one that could shake investor sentiment, impact trade, and even nudge policy responses from Bank Negara Malaysia (BNM).
In the immediate term, the biggest challenge is the interest rate differential. With Malaysia’s Overnight Policy Rate (OPR) sitting at 3.00%, international investors looking for yield will likely pivot toward the U.S., where rates remain significantly higher. That means capital outflows from emerging markets like Malaysia, exerting downward pressure on the ringgit. And because markets move on perception as much as fundamentals, the Fed’s reluctance to signal a definitive rate-cutting path only fuels the dollar’s strength, making the MYR even more vulnerable. The psychology of markets is simple: if the Fed sounds cautious, investors grow defensive—and the safest place to be is the U.S. dollar.
In the midterm, the impact of a stronger dollar on Malaysia’s economy becomes more complex. On one hand, a weaker ringgit makes Malaysian exports cheaper and more competitive, potentially boosting trade. On the other hand, a depreciating currency also raises import costs, driving inflation higher—a headache for policymakers at BNM. If inflation picks up, pressure will mount for the central bank to raise rates, but doing so would risk slowing down domestic growth just as Malaysia is trying to build economic momentum. It’s a delicate balancing act, and one that policymakers will need to navigate carefully.
The long-term picture presents deeper structural challenges. If the ringgit remains under sustained pressure, foreign direct investment (FDI) could take a hit, as investors worry about currency volatility. A persistently weak ringgit would also make it more expensive for Malaysia to service its foreign-denominated debt, tightening financial conditions further. The silver lining is that BNM and Malaysia’s policymakers have tools to counteract these risks. Structural reforms aimed at diversifying the economy, attracting long-term investment, and enhancing productivity could provide lasting support to the currency. But reforms take time, and global markets don’t wait.
Of course, there are also unintended consequences. If capital keeps flowing out due to the U.S. rate advantage, Malaysia could face capital flight—an exodus of funds that could weaken the ringgit beyond what fundamentals dictate. Additionally, if Malaysia keeps rates too low in response to domestic economic concerns, the excess liquidity could fuel asset bubbles, particularly in real estate and equities, leading to financial instability down the line.
So what can Malaysia do? First, BNM could adjust its monetary policy to narrow the rate differential, preventing excessive outflows and supporting the ringgit. Second, policymakers need to double down on strengthening economic fundamentals—investing in key industries, boosting productivity, and fostering innovation to attract sustainable FDI. And finally, if volatility in the currency markets becomes too pronounced, BNM has the option of intervening directly to stabilize the ringgit.
At the end of the day, the Fed’s decisions aren’t made in a vacuum. When Powell speaks, the world listens, and when U.S. interest rates stay elevated, it reshapes capital flows across the globe. For Malaysia, this isn’t just about the ringgit—it’s about staying agile in a global financial system where one central bank’s pause can set off a storm somewhere else.
——————————————————————————-
Economist Samirul Ariff Othman is an adjunct lecturer at Universiti Teknologi Petronas, international relations analyst and a senior consultant with Global Asia Consulting. He did his graduate studies at Macquarie University in Sydney, Australia. The views in this OpEd piece are entirely his own.
Subscribe Below: