Right now, the interest incomes that can be earned on US dollar and Singapore dollar deposits are far higher than that for ringgit deposits (see Table). Hence, it is unsurprising that the ringgit has been depreciating in value against both currencies (see Chart 1). Remember, the exchange rate is the external value of a currency, which is determined by its underlying demand and supply. When demand decreases, the currency depreciates and vice versa.
Bank Negara Malaysia (Bank Negara) kept the overnight policy rate (OPR) unchanged at 3% in its latest Monetary Policy Committee meeting. We agree with the central bank’s decision not to raise the interest rate, even though this will likely contribute to further weakness in the ringgit in the near to medium term.
Interest rate is the price of money, and it would be foolish to think that exchange rates are not driven by interest rate differentials. Like all assets, we hold a currency with the expectation of profiting from it, primarily by earning a return on the savings deposit (the interest rate) and/or through foreign exchange movements (when the currency appreciates). Of course, we also hold a currency for transactional purposes, to pay for goods and services, and there are costs associated with holding different currencies.
