For much of 2025, we have been told that the appreciation of the ringgit is a vote of confidence in the unity government and the Malaysian economy. To a great extent this is justified.
The table below shows the percentage change in value of selected currencies against the ringgit and the US dollar over the last twelve months. A negative number shows the ringgit strengthening against most currencies. The US dollar by contrast has weakened against most currencies.
As we enter 2026, a look at the data and scenarios suggests we may not be seeing a fundamental re-pricing of the value of the ringgit but the results of a flow of positive news, policy influenced capital inflows and narrowing interest rate spreads that may have reached their limit.
There was a turning point for the ringgit in 2024 caused by a policy shift when it reached RM4.80 to the US dollar and looked like it would weaken further. In March of that year Bank Negara began to encourage government-linked companies (GLCs) and government-linked investment companies (GLICs) to repatriate foreign investment income from overseas.
This policy worked to first stabilise and then strengthen the ringgit and by September 2024 it reached RM4.20 and stayed mostly in a normal range between RM4.20 and RM4.40 for around 12 months until October of last year.
In 2025, capital inflows also shifted significantly. Approved investments rose by 13.2% over nine months. The main sources from Asia, including Singapore and China 19%, led the way and data centres and electrical and electronics also benefitted.
In July 2025, Bank Negara cut the overnight policy rate (OPR) to 2.75% as a precaution to protect growth against global trade headwinds including US tariff tensions.
From September the US Federal Reserve, made three 0.25% interest rate cuts, reducing the Federal Funds rate from 4.00-4.25% to 3.50-3.75%. This has effectively cut the interest rate differential, helping to strengthen the ringgit.
These factors supporting the ringgit may not continue during 2026, but perhaps more concerning is the shadow of domestic political uncertainty. As we enter the fourth year of the current administration the “stability premium” that helped the ringgit for the last two or more years may be discounted.
Markets are beginning to eye the lead-up to the GE16 and the concern is not so much that fiscal discipline may yield to populist spending but that there may be too little reform to strengthen wages, incomes and the standard of living for voters.
Worse, the shifting sands of the political coalitions in Malaysia may cause a change in the balance of power before reforms can be implemented.
If investors perceive a shift from “reform mode” to “survival mode” in the 2026 political cycle, there is a risk that capital inflows may slow or even reverse. Any perception of a weak administration or a fracture in the ruling coalition would see the ringgit de-rated quickly.
In 2026, political noise may become a louder driver of the exchange rate than economic signal.
The 8.2% appreciation against the US dollar in 2025 was a combination of good news on the Malaysian economy and not so good sentiment for the US economy, temporary dollar weakness and policy changes by the Federal Reserve.
With Malaysian GDP growth probably slowing slightly to 4.0–4.5% in 2026 and domestic political risks rising, the ringgit is currently overvalued.
Without a stronger narrative on economic reforms to raise wages, incomes and domestic investment we may be set for a sharp correction toward RM4.20 to RM4.40 to the dollar by mid-year, which in my view is within the fundamental equilibrium range for the ringgit-dollar rate anyway.
The views expressed are those of the writer and do not necessarily reflect those of FMT.