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The ringgit continued to strengthen yesterday as rising optimism the economy will grow faster than predicted whetted foreign investors’ appetite for local assets, including stocks and bonds.

The World Bank yesterday raised its forecast for economic growth in East Asia to 8.7% for 2010, up from its previous prediction of 7.8% growth last November.

It also expects the Malaysian economy to grow at a faster rate of 5.7% this year, compared with its earlier forecast of 4.1% made in November.

The FTSE Bursa Malaysia KL Composite Index (FBM KLCI) eked out a 0.72-point gain yesterday to close at 1,345.09 points. The stock market yardstick had risen uninterrupted since March 23.

“Foreign money is flowing into the equity and bond markets spurred by strong growth prospects and favourable government policy moves,’’ said Zulkiflee Nidzam, the head of foreign exchange and bond trading at Asian Finance Bank Bhd (AFB).

A local bank-backed brokerage yesterday predicted foreign investors might increase their holdings of ringgit-denominated government securities to RM70bil by year-end, up from its previous forecast of RM65bil made in January.

Meanwhile, a Bloomberg report yesterday quoted Prime Minister Datuk Seri Najib Tun Razak as saying in Singapore that the Malaysian economy may exceed Bank Negara’s growth estimates this year with the right “policy intervention.”

The country’s gross domestic product (GDP) this year, he said, could expand by 1% to 2% more than Bank Negara’s forecast in March of at least 4.5%.

The ringgit yesterday was traded to a 23-month high of 3.192 against the US dollar, before it settled at 3.211.

Year-to-date, the local currency had advanced 6.7% against the greenback to make it the best performer among active currencies in Asia.

Bank Negara was among the first central banks in Asia Pacific to raise key interest rates on March 4, after Vietnam and Australia, as policymakers expect economic growth to strengthen further.

“Based on the extremely hawkish March 4 statement released by the monetary policy committee, there is a strong likelihood that the overnight policy rate (OPR) will be raised again at the May 13 meeting,’’ MIDF Research said in a strategy report dated April 5.

It expects the OPR will rise to between 2.75% and 3% by the end of the year, from 2.25% currently.

The recent rate increase and the prospect for further hikes are supportive of the ringgit’s further rise.

“Conventional wisdom is that rising interest rates are bad for equity, but rates are rising in Malaysia in the context of a growing economy,” MIDF said,

A similar thing happened in 2006, when local stocks advanced 22% while average lending rates rose 45 basis points and GDP growth accelerated to 5.9%.

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The ringgit is expected to be in rangebound trade next week on the back of speculation that the Chinese Yuan will be revalued, dealers said.

As for the greenback, the currency is expected to gain further strength as worries over the debt crisis of the Euro zone continues, they added.

According to Prudential Fund Management Bhd, speculation on the Chinese yuan’s revaluation had somewhat boosted Asian currencies during the week, despite the stronger US dollar.

It also said in its research note that the US dollar continued to remain attractive compared to the euro, due to the Euro zone sovereign risk issue.

Besides that, Asian central banks are likely to raise rates this year.But rates are expected to remain lower than pre-crisis levels, given especially the prevailing moderate inflation.

During the week just ended, the local currency was traded rangebound and managed to hit a new 19-month high of 3.2980/3010 at Wednesday’s close.

At the end of trade this week, the ringgit rose against the US dollar to 3.3020/3050 from 3.3055/3085 previously.

Against the Singapore dollar, it increased to 2.3653/3697 from 2.3675/3719 last Friday and improved against the Japanese yen to 3.6486/6544 from 3.6501/6558 previously.

The local unit also appreciated against the euro to 4.4861/4905 from 4.5355/5399 but declined against the British pound to 4.9996/5.0051 from 4.9956/5.0011 previously.

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Investors should buy the ringgit against South Korea’s won and Japan’s yen as Malaysia’s central bank may increase its policy rate as many as two more times in 2010, the Royal Bank of Scotland Group plc said.

Bank Negara Malaysia will continue reining in monetary stimulus after last week’s rate increase, while government pressure will mean that the Korean and the Japanese central banks won’t increase borrowing costs anytime soon, RBS, the fourth-largest currency trader, wrote in a research note published on Tuesday.

Malaysia’s central bank will next review its policy on May 13.

“Bank Negara could do a few more rate hikes,” RBS strategist Chia Woon Khien said in an interview in Singapore yesterday. “The question is whether they want to go straight to neutral level or stay a little dovish along the way.”

Malaysia’s central bank raised its benchmark overnight rate by 25 basis points to 2.25 per cent on March 4. The RBS report said there is “scope for at least one, if not two more, 25-basis point hikes” in the coming year. Prime Minister Datuk Seri Najib Razak said last week that Southeast Asia’s third-largest economy may expand 6 per cent this year, twice the pace of the official forecast, on a rebound in exports.

The ringgit has risen 2.6 per cent this year against the dollar, the best performer among Asia’s most active currencies excluding the yen. It climbed 0.6 per cent to 3.3230 at 12.10pm in Kuala Lumpur, the strongest level since August 2008.

The bank recommended entering a three-month forward contract to sell the won at 339.36 per ringgit, targeting the spot rate to reach 355 when the bet expires on June 9. RBS also suggested a similar forward bet at 26.74 yen per ringgit, predicting the spot rate at 28 upon the contract’s maturity.

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