SINGAPORE - The Malaysian ringgit hit its strongest level in more than four months on Monday as investors hailed government plans, including a new consumption tax, to reduce the fiscal deficit.
On Friday, the country moved to alleviate concerns over its fast-rising debt, announcing a goods and services tax (GST) in 2015 at a higher-than-expected 6 per cent, abolishing subsidies on sugar and hiking property taxes to dent a surge in home prices.
The ringgit rose as much as 1.1 per cent to 3.1220 per dollar, its strongest since June 17, as traders said the announcement prompted some capital inflows. The Malaysian currency later gave up some of the gains and was quoted at 3.1330 as of 0200 GMT.
Three-year government bond yields fell to 3.093 per cent, the lowest since June 7, while Kuala Lumpur stocks edged lower.
"In our view, these budget measures will enhance the investment appeal of Malaysia," Barclays said in a client note.
"Given the rating agencies' focus on Malaysia's fiscal policy, we think these steps towards fiscal consolidation, despite a challenging global backdrop, should reduce the likelihood of rating action and the associated credit risk priced in."
In July, ratings agency Fitch lowered its outlook on Malaysia's sovereign debt to negative, citing darker prospects for reforms after the ruling coalition's weak election result in May that appeared to hurt Prime Minister Najib Razak's standing.
Domestic markets suffered a bout of turmoil over the summer as the country's shrinking current account surplus left the country vulnerable to fund outflows due to expectations that the US Federal Reserve may scale back its monetary stimulus.
As Najib's fiscal plans eased such worries, the ringgit strengthened past chart resistance at 3.1415, the 200-day moving average.
"Our budget was well received by the market, which thinks it will be enough to help Malaysia avert a ratings downgrade," said a senior Malaysian bank trader in Kuala Lumpur.
The trader said the ringgit is seen heading to 3.1000-3.1100. The 61.8 per cent Fibonacci retracement of the currency's depreciation between May and August lies at 3.1024.
Still, some local investors took profits as the ringgit is approaching a technically overbought area. The 14-day dollar/ringgit's relative strength index was at 33.1, a notch higher than the 30 threshold. A reading below 30 would indicate that the pair is seen as oversold.
(Reporting by Jongwoo Cheon; Editing by Chris Gallagher)