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Monday, August 22, 2005

Business News > The Independant

Business NewsMalaysia's ringgit lacklustre one month after dollar peg removed


Aug 21: Malaysia's ringgit has had a lacklustre month since abandoning the peg to the dollar, and its failure to appreciate is triggering more selling from disappointed investors, analysts say.

Malaysia dumped the peg of 3.8 ringgit to the dollar on July 21, minutes after China revalued its yuan. The peg was introduced during the 1997-98 Asian financial crisis but by 2005 had outlived its usefulness.

The central bank made it clear it would ensure the ringgit appreciated only gradually under the new managed float, but many brokers forecast it to rise to 3.5 to the dollar by year's end.

However, since making initial gains it has gradually drifted back down to 3.7687 on Thursday, its weakest level since the day after the peg was dropped. On Friday it rallied slightly to close the week at 3.7655 to the dollar.

"Clearly the Malaysian ringgit's performance so far has been a bit disappointing," said Singapore-based JP Morgan analyst Claudio Piron. "China has effectively revalued its currency by 2.0 per cent.

Malaysia's was widely regarded as being undervalued by 8.0-10 per cent and yet if we were going to calculate it today the appreciation of the ringgit would come to just 0.7 per cent." Cedric Ong, a senior dealer with Public Bank, said disillusioned foreign investors were cashing out of the ringgit.

"Initially when the ringgit strengthened everyone was bullish but... now people think that the central bank may not want the ringgit to strengthen too much," he said.

"Obviously I'd prefer a stronger ringgit, I think this is slightly disappointing. A slow, gradual process would be good for the country," he said.

Ong said he believed 3.70 would be a fair value for the currency, but that it was not likely to reach that level by the end of the year.

OSK analyst Lee Soo Kai said that in the long term the ringgit would strengthen but that in the short term it was being buffeted by investment flows.

"Investors who have put their money in in anticipation that the ringgit will strengthen... are losing patience and taking their money out of the system and that has depressed the ringgit over the past few days," he said.

"There was a tremendous inflow of hot money immediately after the re- pegging in anticipation that the ringgit would strengthen to 3.7 in a very short span of time, which did not materialise," he said.

Lee said the central Bank Negara had successfully prevented a rapid appreciation by both intervening in financial markets and scaring off speculators by making its intentions public.

"Investors start wondering whether it will really appreciate at all so they start selling, so in a way they don't need to intervene so much because of that," he said. "In a way it is self-fulfilling".

Piron said the ringgit's performance was not a reflection of the fundamentals of the Malaysian economy, which is forecast to expand by 5.0-6.0 per cent this year, and that a stronger dollar was also a contributing factor.

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