Two forces are driving FX markets: geopolitics and interest rates, both ultimately expressed through inflation expectations. Geopolitical tensions are shaping risk sentiment and feeding inflation via higher and more volatile energy prices. At the same time, persistent inflation risk is keeping expected yields elevated, or at least “steady-high”, across major markets.

Against this backdrop, the US dollar is still supported. Geopolitics tend to be USD-positive: elevated uncertainty increases safe-haven demand, and higher oil prices have often coincided with a firmer dollar. The US also offers a favourable yield differential versus most G10 and many emerging market (EM) currencies. With the Fed maintaining a hawkish tilt, while still developing its guidance, markets continue to price in the risk that US rates stay higher for longer than many peers. A comparatively resilient US growth outlook reinforces the dollar’s relative appeal.

This view isn’t blind to vulnerabilities, particularly around US fiscal dynamics and domestic politics as the country approaches the 2026 midterm elections. However, credible G10 alternatives remain limited for now. We therefore retain a constructive USD view, while noting the importance of diversification across FX exposures to help manage drawdowns and concentration risk in a higher-volatility environment.

Malaysia has held up comparatively well. The ringgit benefits from a more balanced energy position than many EM Asia peers, reflecting partial domestic oil self-sufficiency and Malaysia’s status as a net LNG exporter. Palm oil, one of the country’s largest exports, has also seen firm pricing alongside the broader commodity backdrop, adding external support. In addition, Malaysia’s established technology and electronics export base has benefited from the ongoing AI-led semiconductor upcycle, giving MYR a growth pillar beyond commodities.

The macro backdrop reinforces this resilience. Growth accelerated to 6% y-o-y in Q2 2026 (from 5.4% in Q1 2026), above the government’s 4%–5% forecast range for 2026. Exports strengthened and widened the trade surplus, while inflation has remained contained below 2%. This has given Bank Negara Malaysia room to hold policy steady rather than needing to respond defensively via rate action. Alongside targeted measures to attract foreign inflows and encourage repatriation of overseas earnings by state-linked firms, the overall environment has been broadly supportive for MYR even as the USD story has remained constructive. As a result, USD/MYR has traded in a fairly contained range in recent months.

Overall, we could see MYR somewhat resilient, supported by structural resilience and a still-favourable growth/inflation mix. That said, near-term direction is still likely to be driven primarily by the broader USD and rates narrative.

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