KUALA LUMPUR: The ringgit rally and Japanese bank MUFG Bank Ltd's forecast that the currency could strengthen further to 3.7000 versus the US dollar at end-2026 is reviving memories of its post-peg surge in 2005.
When Malaysia scrapped the 3.8000 peg on July 21 2005 in favour of a managed float, the currency strengthened to 3.7681 by November that year, about 3.4 per cent firmer than current levels.
The present rebound follows a steep slide to a 24-year low of around 4.80 in early 2024.
On Feb 12 this year, the ringgit hit an intraday high of 3.8980 before closing at 3.9000, marking the first sustained move below 4.00 in nearly eight years.
The ringgit may extend its gains with MUFG expecting a rally to 3.7000 versus the greenback at the end of 2026.
The bank said the projected strength would be supported by what it describes as a more durable appreciation cycle anchored in Malaysia's structural fundamentals.
In its latest FX outlook, MUFG said: "We expect US dollar-ringgit to continue trending lower toward the 3.7000 level by end-2026," anchored by ICT-led investment inflows, macroeconomic stability and improving capital flow dynamics."
On Jan 31 this year, the pair stood at 3.9453.
MUFG projects the pair at 3.8500 in the first quarter (Q1) of 2026, 3.8000 in Q2, 3.7500 in Q3 and 3.7000 in Q4.
The ringgit opened firmer against the US dollar on Friday, hovering near its strongest level in almost eight years, as persistent weakness in the greenback and improving domestic economic prospects lifted sentiment towards the local currency.
At 8am, the ringgit rose to 3.8945/9110 against the US dollar from Thursday's close of 3.8995/9060.
Since the 2005 unpegging, the ringgit's estimated long-term "fair value" average stands at around 3.8200.
This may suggest that while momentum is strong, the currency may be approaching equilibrium levels rather than entering an extended appreciation cycle.
Market observers said the ringgit reaching 3.7000 by the end of 2026 is realistic, supported by strong domestic fundamentals, foreign investment inflows and expectations of a softer US dollar cycle, though global and regional uncertainties could affect the timing.
UniKL Business School economic analyst Associate Professor Dr Aimi Zulhazmi Abdul Rashid said the possibility of the ringgit reaching 3.7000 by the end of 2026, or even earlier, is certainly feasible.
"It also seems that Bank Negara Malaysia is allowing market forces to determine the direction of the national currency," he told Business Times.
Aimi said several positive factors underpinning the ringgit's strength, including a weakening US dollar, robust Malaysian macroeconomic data, a resilient domestic economy and strong inflows of foreign direct investment (FDI) in the IT sector.
He said these investments have a multiplier effect on other economic segments, including construction, retail, real estate, logistics and transportation.
He also attributed the recent surge in the ringgit to portfolio revisions by fund managers, driven by Malaysia's corporate growth.
"Bursa Malaysia has climbed back to over 1,750 points, with foreign investors acting as net buyers.
"Meanwhile, challenging economic situations in the region, such as domestic issues in Thailand and Indonesia, have prompted investors to look at Malaysia as an alternative portfolio option."
Aimi said the last time the ringgit traded above 3.7000 was in 2005, following the de-pegging from 3.8000 under then-prime minister Tun Abdullah Ahmad Badawi.
He added that on July 22, the day after the peg was removed, the ringgit rose 0.33 per cent to 3.7875 against the US dollar.
Aimi said the current environment differs significantly from 2005, as Malaysia had previously pegged the ringgit during the 1997-1998 Asian financial crisis.
"The current flow of investment into Malaysia contribute greatly to make ringgit a darling among Investors and fund managers.
"Malaysia main trading partner China, also moving its yuan internationally as international trade currency especially through BRICS. This factor also contribute greatly to ringgit strengthening among the forex traders," he added.
SPI Asset Management managing partner Stephen Innes said the prospect of 3.7000 is achievable, but it depends heavily on a softer US dollar cycle and sustained capital inflows into Malaysia's tech-driven investment upcycle.
"If US Fed easing extends beyond just two cuts and narrows rate differentials, while domestic macro stability holds and Bank Negara does not feel compelled to ease aggressively in line with the US Fed, 3.70 is realistic rather than an aggressive target," he said.
Innes also highlighted factors that could accelerate or delay the ringgit's move, including faster US Fed cuts, stronger ICT-related foreign direct investment, firm commodity prices and renewed foreign bond inflows could speed up appreciation.
Conversely, global risk-off conditions, a downturn in electronics exports, softer commodities, renewed pressure on the yuan by the People's Bank of China, or a less accommodative US Fed could delay the move and act as a "ringgit showstopper," he added.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit could potentially reach 3.7000, noting that the Malaysian economy has performed well over the past three years despite facing heightened uncertainties.
Afzanizam said reformist economic policies also helped to build confidence among investors esp among the foreign funds.
"We saw net inflows in bond market and recently in the equities.
"We have seen net inflows into the bond market and, more recently, into equities.
"Foreign investment in the real sector has also increased, as reflected by a 47.5 per cent jump in foreign investment approvals between January and September last year.
"All these factors point to a strong economy and improving investor confidence. As such, the ringgit should remain on track to appreciate further going forward," he added.
ICT Upcycle A Key Pillar
Meanwhile, MUFG said Malaysia's economy is in the midst of an ICT-led investment upcycle.
Total investment approvals across manufacturing and services rose 14.7 per cent year-on-year in the first nine months of 2025.
ICT has emerged as the largest contributor, with approvals in the segment jumping about 32 per cent year-on-year over the same period, supported by strong foreign participation.
MUFG noted that sustained foreign direct investment inflows are typically currency-supportive as they enhance productivity and strengthen external balances over time.
It added that the current cycle is differentiated from past commodity-driven upswings by the dominance of high-value ICT and services investments.
Macro Stability Compressing Risk Premiums
MUFG said macroeconomic conditions remain supportive.
Inflation has stayed well-contained despite RON95 subsidy rationalisation and adjustments to the sales and services tax, allowing Bank Negara to keep policy steady.
Fiscal discipline has also helped to anchor sovereign risk and investor confidence.
MUFG expects Bank Negara to maintain a neutral stance, keeping the policy rate at 2.75 per cent through 2026.
At the same time, further US Federal Reserve (US Fed) easing is likely to narrow interest rate differentials, enhancing Malaysia's relative yield appeal.
This has already contributed to a steady pickup in net foreign bond inflows since 2024.
With reasonable equity valuations, a solid macro backdrop and an ongoing tech upcycle, MUFG believes Malaysia is "well positioned for renewed foreign equity interest", providing an additional upside catalyst for the ringgit.
External Tailwinds & Risks
Externally, MUFG said firmer commodity prices are supporting Malaysia's terms of trade, while rising US capital expenditure in computers and peripherals is benefiting the electronics sector.
Continued resilience in the Chinese currency, given the strong renminbi-ringgit correlation, also underpins the ringgit.
Downside risks include a sharp global growth slowdown, a significant fall in commodity prices or a downturn in the global electronics cycle, it added.
