Investors tend to park their money in countries with higher lending rates to capitalise on higher returns.

The ringgit weakened as low as 3.0619 versus the Australian dollar at 5.10am yesterday before strengthening to 3.0432 at 10.16am. A day earlier, the ringgit was traded at 3.0587 against the Australian dollar, the weakest in 14 months since August 2008, compared to the 2.2824 level seen in February this year

Economists said the surprise move by Australian lawmakers could result in similar initiatives among other commodity-based economies such as New Zealand and Canada.

“Countries that may follow suit could be other commodity-based economies, “ Bank Islam Malaysia Bhd senior economist Azrul Azwar told The Edge Financial Daily yesterday.

In Malaysia, while commodities like palm oil, and oil and gas, constitute a crucial component of the nation’s economy, Azrul said the country should not be regarded as a commodity-based entity.

Meanwhile, an improving economic climate in Malaysia is expected to see a stronger a ringgit versus a  weakening US dollar.

Azrul said as recovery in the broader landscape was still tentative, a rapid appreciation of the ringgit  might have a negative impact on the nation’s export competitiveness. However, a stronger ringgit could be one  of the contributing factors in containing imported inflation.

“With increasing signs of improving economic conditions in Malaysia, and expectation of a resumption of positive GDP (gross domestic product) growth by the fourth quarter of 2009, the way forward for the ringgit is to strengthen.

“I think it is prudent to let market forces dictate the level of the ringgit but at the same time we should exercise an orderly and gradual strengthening of the ringgit,” he said.

Bank Negara Malaysia had pegged the ringgit at 3.80 against the US dollar on Sept 2, 1998 during the Asian financial crisis then. The fixed-exchange rate policy was scrapped on July 21, 2005, and replaced by a managed-float system which allows the central bank to monitor the ringgit’s value against a basket of currencies.

An interest rate hike in the US would trigger a sharp rebound in the  US dollar. In its latest “Standard Chartered Global Focus” report, the bank said it did not foresee US policymakers initiating a rate hike throughout 2010.

“We think this is unlikely. We also believe that the US and the UK will continue to run wide fiscal deficits  through 2010 — far larger as a share of GDP than those in the EM (emerging-market) economies. This, combined with ultra-loose monetary policy, may put continued negative pressure on both currencies,”  Standard Chartered said.

This article appeared in The Edge Financial Daily, October 8, 2009.