By Sukhdave Singh

KUALA LUMPUR, Malaysia: It is difficult to credibly relate short-term trends in financial markets to fundamentals. This is particularly the case with exchange rates, where short-term movements mostly reflect financial flows and changing sentiments.

 Earlier, the ringgit weakened against many currencies as rising interest rates in the other economies attracted financial flows to those economies. Now, those central banks are cutting interest rates, and the financial markets are doing a big spin on the prospect of recession in those economies. So, some of the earlier flows and sentiments are reversing. The ringgit is benefiting. Nothing has changed for the Malaysian economy over this relatively short period.

 But economic fundamentals do affect the long-term trend in the ringgit. If the Malaysian economy charts sustained good growth, its exports substantially outperform imports, and it attracts strong foreign direct investment inflows - these would provide a strong foundation for a stronger ringgit over the longer term.

 This does not appear to be the case right now. The ringgit is primarily being influenced by developments outside Malaysia. Other regional currencies are also benefitting from the recent weakening of the major currencies.

 Also, it is logically inconsistent to claim that negative short-term movements in the exchange rate are unrelated to domestic fundamentals, but then turn around and say that positive short-term movements in the exchange rate are being driven by better domestic fundamentals.

 *Sukhdave Singh is a former Bank Negara Malaysia (BNM) deputy governor.*