The Federal Reserve will announce its latest federal interest rate resolution statement in the early hours of September 22nd, Damascus time.
U.S. inflation in August was higher than expected, that is, up 8.3% year-on-year! Although U.S. inflation slowed in August compared to July, this is still as much as three times higher than the Fed’s 2% target.
The Fed may raise rates by 0.75% to 1.00% next week. If the Fed raises rates again, it will be the 5th time the Fed has raised rates this year.
The Fed announced a 0.25% rate hike in March, another 0.50% in May, and 0.75% in June and July, respectively. The current U.S. federal prime rate is 2.50%. If the Fed announces another 0.75% hike next week, then the U.S. federal prime rate will be 3.25%.
There is no doubt that a Fed rate hike will lead to an accelerated depreciation of the Malaysian dollar! The Malaysian dollar has now come to a level of 4.53 against the US dollar, which is a new low in more than 24 years. The Bank Negara’s 0.25% interest rate hike in September could not stop the continued depreciation of the Malaysian dollar against the US dollar.
The Federal Reserve has been raising interest rates frequently, so how will this affect Malaysia? Here take a look at the U.S. interest rate hike, the impact on emerging markets.
1. RM devaluation
Interest rate rise is a signal of currency strength, global funds will be attracted to move to the U.S. dollar assets, that is, depositors will exchange money from other countries with lower interest rates into U.S. dollars, moved to the United States local banks, U.S. dollar demand to see an increase, will also push up the exchange rate. The Federal Reserve’s four interest rate hikes have led to a significant depreciation of the Malaysian dollar against the U.S. dollar, the lowest when the U.S. dollar can be exchanged for RM 4 53 sen.
2. Foreign capital withdrawal from emerging markets
U.S. interest rates higher, triggering a large number of funds originally parked in emerging markets to withdraw to the United States. This means that a rise in US interest rates will lead to an oversold Malaysian stock market. Our stock market also retreated to around 1,468 points after the Fed’s interest rate hike.
3. Increase the pressure of national debt service
Generally speaking, a rise in US interest rates will lead to a big rise in the US dollar, which leads to heavy pressure on debt servicing for countries that default on US dollar bonds.
4. import goods become more expensive
Stronger U.S. dollar, including the ringgit Asian currencies, including the fear of a depreciation war! To buy production equipment and raw materials in U.S. dollars will face greater challenges for the company’s operations. And international fuel prices, may also lead to domestic consumption of oil, electricity, natural gas, and even designer bags, high-end clothing prices rise.
5. Commodities are falling, gold is becoming less valuable
The strong rise of the dollar will impact the dollar-denominated commodities, including raw materials, minerals, metals, energy will be under pressure, market capital may shift from the higher nature of the safe-haven gold to the dollar, gold prices are bearish.