Trump's tariffs shake Ringgit as Dollar surges

[MALAYSIA] The Malaysian ringgit opened slightly lower against the U.S. dollar on February 3, 2025, as the Dollar Index (DXY) rose in response to recent tariff developments announced by former U.S. President Donald Trump. These tariffs have once again ignited global market reactions, including pressure on emerging market currencies like the ringgit. In this article, we explore how Trump's tariff policies are impacting the Malaysian ringgit, the broader currency market, and what this means for Malaysia’s economy in the near term.

On the morning of February 3, 2025, the Malaysian ringgit opened at 4.25 per U.S. dollar, down slightly from the previous day's close. This decline came as the U.S. Dollar Index (DXY), which tracks the strength of the U.S. dollar against a basket of other major currencies, surged in response to the reintroduction of tariffs on goods imported from key trading partners, including China and Malaysia.

The reintroduction of tariffs by Trump—who, though not in office at the time of writing, has continued to exert influence on U.S. trade policy—sent a ripple effect through global markets. The DXY rose by approximately 0.5%, a clear indication of investor sentiment favoring the U.S. dollar as a safe haven amid trade tensions.

“The reimposition of tariffs by the former President has created a short-term bullish sentiment for the U.S. dollar,” said analyst Tan Zhi Ming from Maybank Investment Bank. “The rise of the DXY has led to weakness in other currencies, including the ringgit, which remains vulnerable to global market shifts.”

How Trump's Tariffs Impact the Ringgit

The Malaysian ringgit has traditionally been sensitive to global trade policies, particularly those of the U.S., due to Malaysia’s export-heavy economy. The reintroduction of tariffs on Malaysian exports could have both direct and indirect effects on the country’s currency.

Export Costs Increase

As U.S. tariffs are reimposed on Malaysian goods, the cost of exporting these products to the U.S. market rises. This affects Malaysia’s trade balance, particularly with regard to its key exports such as palm oil, electronics, and petroleum products. When Malaysia’s export revenues are hit by higher tariffs, there is a potential for reduced demand for the ringgit from foreign buyers, which pressures the currency down.

Investor Sentiment and Flight to Safety

In times of uncertainty, investors often flock to safe-haven assets such as the U.S. dollar. With the DXY rising, the demand for the greenback increases. This is especially true in emerging markets like Malaysia, where capital flows are more sensitive to fluctuations in the global financial landscape. The flight to safety typically leads to a weaker ringgit, as investors move their capital into U.S. assets.

Rising Import Costs

The tariffs could also affect Malaysia’s import costs, particularly for goods from the U.S. and China. Higher tariffs often translate into higher prices for imported products, which could lead to inflationary pressures in Malaysia. To maintain the purchasing power of the ringgit, the central bank may have to make adjustments, including changing interest rates. This dynamic can create additional volatility for the ringgit in the short term.

“When the U.S. imposes tariffs, it triggers a domino effect in global trade. For Malaysia, the pressure on the ringgit is not just about direct trade but about investor perceptions and the broader currency landscape,” said George Tan, a senior currency strategist at CIMB Bank.

The Role of the U.S. Dollar in Emerging Markets

The U.S. dollar is often seen as the primary global reserve currency, and as such, it has a profound influence on emerging market currencies. When the U.S. dollar strengthens, as it has recently due to Trump’s tariff reimposition, currencies from emerging markets—including the ringgit—tend to weaken.

The DXY is a key measure of this strength. A rising DXY generally indicates increased demand for the U.S. dollar, either due to better economic performance in the U.S. or due to global uncertainty. In this case, the reimposition of tariffs—especially when markets are already on edge about global economic growth and geopolitical issues—has led to an increase in the value of the dollar.

“The U.S. dollar tends to gain in times of uncertainty, and this is particularly true when trade policies like tariffs come into play,” explained Tan Zhi Ming. “Emerging market currencies, including the ringgit, are particularly vulnerable to these shifts.”

For Malaysia, which is heavily dependent on exports and imports, the strength of the U.S. dollar can make it more expensive to import goods and can reduce the competitiveness of Malaysian exports. When the ringgit weakens against the dollar, the cost of doing business with U.S. and other dollar-based economies increases, which has a knock-on effect on inflation and economic growth.

Malaysia's Trade and Economic Outlook Under Tariff Pressure

Despite the immediate pressures on the ringgit, Malaysia’s overall trade outlook remains largely positive, especially in sectors like electronics and commodities. The country has been diversifying its trade partners, particularly in the wake of U.S.-China trade tensions, which have forced many countries, including Malaysia, to seek new markets for their exports.

The reintroduction of tariffs by Trump, however, complicates this picture. As U.S.-China relations sour once again, Malaysian exporters may find themselves facing higher costs when doing business with these two major economies. The increase in tariffs could thus act as a drag on Malaysia’s export growth, potentially reducing the trade surplus that has supported the ringgit in the past.

Nevertheless, Malaysia’s economic fundamentals remain strong, and many analysts believe that the country’s diversified economy will provide some cushion against the negative effects of Trump’s tariffs.

“In the long run, Malaysia’s export markets in Asia and other regions are likely to offset some of the trade disruptions caused by higher tariffs,” said Mohd Hassan, a senior economist at RHB Bank. “However, the short-term impact on the ringgit will be notable, particularly as global markets digest these changes.”

The Impact on Foreign Investment

Another significant factor is the impact of tariffs on foreign direct investment (FDI) into Malaysia. The imposition of tariffs often leads to uncertainty, and when global markets are uncertain, investors are typically more cautious about committing capital to emerging markets. This caution can lead to lower FDI inflows, which reduces demand for the ringgit and puts additional downward pressure on the currency.

However, it is important to note that Malaysia has established itself as a key destination for foreign investment in Southeast Asia due to its competitive labor costs, strategic location, and solid infrastructure. As long as these fundamentals remain intact, Malaysia is likely to continue attracting significant investment, although tariffs may pose a short-term challenge.

“Foreign investors will always be on the lookout for stability. Even with tariff concerns, Malaysia’s strong economic position and strategic location will continue to draw interest, particularly from sectors like technology and manufacturing,” said Anita Lee, an investment analyst at UBS.

What Does This Mean for Malaysians?

For Malaysians, a weaker ringgit against the U.S. dollar means higher import costs, which could lead to inflationary pressures on goods ranging from electronics to fuel. The central bank of Malaysia, Bank Negara Malaysia (BNM), may decide to adjust interest rates or implement other monetary policies to mitigate the effects of these external pressures.

Additionally, Malaysians who rely on imported goods or travel abroad may face higher prices in the near term. The rise of the U.S. dollar could also make loans denominated in foreign currencies more expensive for Malaysian businesses, potentially affecting their bottom line and investment strategies.

For those looking to travel or shop internationally, the rising dollar could mean higher costs, as the Malaysian ringgit struggles to maintain its value.

The recent tariff reimpositions by Donald Trump, alongside the subsequent rise of the DXY, have created a challenging environment for the Malaysian ringgit. While the long-term outlook for Malaysia remains positive due to its strong trade relationships and diversified economy, the short-term effects of higher tariffs and a stronger U.S. dollar are palpable.

As we move forward, the ringgit’s performance will depend on a variety of factors, including global trade relations, investor sentiment, and the broader trajectory of U.S. economic policy. Malaysians, businesses, and policymakers alike will need to remain agile as they navigate this period of uncertainty, adjusting strategies to mitigate the challenges posed by a fluctuating currency and a shifting global trade environment.