Ringgit gains on US rate cut bets as labor data softens

At first glance, the ringgit’s early-morning strength against the US dollar may appear cyclical—just another knee-jerk FX reaction to softer-than-expected US economic data. But zooming out, the implications are more consequential. This isn't merely about the ringgit clawing back from oversold territory; it’s a reflection of capital realignment, rate divergence compression, and rising ambiguity in the US policy trajectory.

Last week’s US jobless claims, rising to 226,000 against expectations of 221,000, mark the second consecutive uptick—confirming a pattern rather than a statistical fluke. This has shifted bond market expectations sharply, with futures now pricing in a greater likelihood of a rate cut in September. The US Dollar Index eased by 0.09%, but the impact in FX markets was regionally asymmetric: while the ringgit appreciated against the greenback, it remained mixed against other majors like the yen and pound.

This divergence is what matters. The ringgit’s movement isn’t necessarily signaling domestic strength—it’s absorbing external softness. And in doing so, it’s offering a real-time readout of how sensitive Southeast Asian currencies remain to US monetary signaling, even in the absence of a formal Fed pivot.

The Federal Open Market Committee (FOMC) has maintained its line: rate decisions will remain data-dependent. Yet the market, and by extension regional central banks, are no longer waiting for full confirmation. A second consecutive rise in jobless claims pushes labor market resilience into question—undermining one of the final pillars of hawkish policy.

While inflation remains sticky and core PCE isn’t yet aligned with the 2% mandate, the Fed’s tolerance for labor softening appears more limited than previously telegraphed. The September meeting may now function less as a reset and more as a test: can the Fed cut without triggering a dollar exodus or reigniting inflation expectations?

For Malaysia, the significance lies in how these shifting odds narrow policy divergence. Bank Negara Malaysia (BNM) has held rates steady for the past two quarters. But the pressure to intervene or tighten further—largely imported from the Fed’s posture—is receding. This gives BNM more breathing room to prioritize domestic inflation and growth trade-offs, rather than playing catch-up to avoid capital flight.

Friday morning’s appreciation saw the ringgit move to 4.2205/2405 against the US dollar, from 4.2340/2385 the previous day. While modest in absolute terms, the timing is strategic. It followed an afternoon session of selling pressure, which had threatened to reintroduce volatility into Malaysia’s external accounts.

Importantly, the ringgit remained weaker against the yen and British pound, reflecting broader global dynamics: the yen is strengthening on safe-haven flows and BOJ yield curve control flexibility, while the pound is buoyed by rate differentials and relative political clarity. The ringgit’s strength came instead from regional rebalancing—firmer against the Singapore dollar, Thai baht, Philippine peso, and Indonesian rupiah.

This points to a technical but telling truth: the ringgit is regaining short-term composure, not surging on fundamental flows. It reflects diminished USD pressure more than it does rising investor demand for ringgit-denominated assets. In FX terms, that’s a relief rally—not a rotation.

The key question now facing policymakers is not whether to respond, but whether to anticipate. A firmer ringgit does not necessitate a rate move, nor does it imply material capital inflow. What it does offer is margin—an interlude of stability that allows BNM to focus on growth sustainability and domestic liquidity dynamics.

If US rate cuts do materialize in September or Q4, Malaysia and other EMs could benefit from a tactical rotation of yield-seeking capital. But the window is narrow, and any inflows will remain contingent on real rate spreads, commodity terms of trade, and geopolitical risk tolerance. The upside from a softer dollar is limited unless paired with structural credibility or domestic reform signaling.

In short: stabilization is not acceleration.

Looking regionally, Singapore’s managed float limits short-term FX swings, but longer-term adjustments in its nominal effective exchange rate (NEER) basket could reflect similar pressure relief. Thailand’s baht and Indonesia’s rupiah—typically more volatile—also firmed against the ringgit, suggesting broad recalibration among ASEAN peers.

This narrowing divergence between ASEAN and G3 monetary signals creates a more neutral policy corridor. Central banks that were under pressure to hike may now shift toward liquidity preservation and selective easing. Yet capital will remain cautious—burned by 2022’s volatility and still navigating patchy growth recoveries.

This ringgit movement is not noise. It reflects a shifting global monetary signal—one where labor market softening in the US is no longer ignorable, and where forward-looking capital is adjusting preemptively.

Malaysia’s FX gains are less about strength, and more about relative reprieve. But in the context of 2024–2025’s monetary realignment, that reprieve is valuable. It grants policymakers time to recalibrate without defending artificially.

This may reflect deeper caution about secondary inflation persistence in the US. It may also narrow Malaysia’s divergence with ECB and Fed postures—without forcing its hand. Capital is watching. The ringgit’s modest gain is not an end—it’s a temporary alignment. And in currency markets, alignment is always conditional.