Macroeconomic Determinants of the US Dollar-Malaysian Ringgit Exchange Rate: Insights for Malaysia’s De-Dollarization Agenda

Abstract

Exchange rate stability remains vital for Malaysia’s macroeconomic management and external competitiveness because of Malaysia’s close commercial and financial ties with the United States. The continued volatility in the US Dollar-Ringgit exchange rate is causing issues for monetary authorities, indicating both global disruptions and internal differences. Hence, this study aims to empirically analyse the macroeconomic factors impacting the US Dollar-Malaysia Ringgit exchange rate and provide insights into Malaysia’s long-term monetary stability. The autoregressive distributed lag (ARDL) model is used to examine both short- and long-term correlations among key macroeconomic indicators, with the analysis spanning annual data from 1974 to 2023. The findings show that increases in the money supply and inflation depreciate the ringgit, while higher GDP growth and foreign direct investment strengthen its value, with a continuous adjustment towards long-run equilibrium. The findings suggest that Malaysia’s exchange rate fluctuations are primarily driven by underlying macroeconomic factors rather than speculative considerations. The research provides policy-relevant data for developing approaches to increase exchange rate stability and monetary autonomy. Improving local fundamentals and encouraging disciplined liquidity management are critical steps towards furthering Malaysia’s de-dollarisation goal and enhancing the ringgit’s reputation within a multipolar financial system.