Has dollar pegging paid off for Malaysia?

Pegging is the policy of controlling the value of a currency by linking it to another currency. The US dollar emerged as a currency used as a peg for many currencies including Malaysia ringgit in 1997-98 Asian currency crisis.



Since January 2003, when the dollar depreciated about 27 percent against the Euro, most of the Asian currencies have been appreciating against the dollar, ranging from 6 percent by the Singapore dollar, to 10 percent by the Thai baht and 12 percent by the Korean won.

The Malaysian ringgit was initially pegged to the US dollar following the Southeast Asian economic crisis. It shifted in 2005 from pegging to a managed float against a basket of currencies. Immediacy, ringgit rose on Monday to 3.4200 to the dollar from 3.4610 at the close of Asian trade on Friday.

Undeniably, the record shown that Asian central banks had been intervening foreign exchange market to prevent strengthening of their currencies, through some kind of soft peg against US dollar. Apart from China’s Renminbi, Hong Kong’s dollar and Malaysia’s ringgit, the rest of the Asian currencies did have some degrees of flexibility against the US dollar.


Since the 1997-98 Asian financial crisis, most emerging Asian market economies had implemented de facto or explicit peg against the US dollar, and continue maintaining the policy of undervalued currencies.



A key factor in the dollar's fall was seen to be happened when US has run huge trade deficits over the last couple of years that caused officials from the Group of 20 industrial and major developing countries in Germany called for the US to cut its federal deficit.

The falling of US dollar in value against other currencies has great economic impact toward the economic of the world. It caused the risen of oil prices close to record highs when dollar has touched all-time lows recently. When Brent crude hovered just under $80/bbl, while the euro moved to $1.38 and the dollar sank below its 1995 lows on a trade-weighted basis against major currencies.

The dollar fell 1.6 percent to US$1.4227 against the euro, the strongest since September 18, 2007. The dollar has gained almost 12 percent since touching the all-time low of US$1.6038 per euro on July 15, 2008, the weakest level since euro made its debut in 1999, as the European economy slumped and crude oil dropped more than 30 percent to about US$100.95 a barrel from its peak of US$147.27.


The era of the strong, overvalued dollar had gone with the wind, as a result of weaker US growth, a large and persistent trade deficit, and surging commodity prices. The most recent strong dollar period started in 1995, gradually dissipated after 2003, and now is in clear retreat.

As US is the world's leading importer of goods, the rise of euro means everything is more expensive for Americans. They have to buy at higher prices, but getting easier for manufacturers to sell products overseas more competitively. It costs more dollars for American to buy euro or yen or products from Europe or Japan. The products become more expensive, resulting less attractive to Americans hence huts the standard of living.

China and other Asian export powers have also accumulated dollars by keeping their currencies undervalued. China has accumulated $1.5 trillion in foreign reserves, which it is beginning to deploy. State-controlled natural resource companies in Russia are buying into international energy firms and industries such as aluminum. The Abu Dhabi Investment Authority has an estimated $500 billion to $875 billion pool that it is using to build stakes in foreign enterprises and domestic petrochemicals industries.


The huge foreign liquid reserves and a weakening dollar are making US based assets increasingly attractive to foreign buyers. Weaker dollar makes it cheaper for foreign investors to acquire key US assets.

Undoubtedly, the weakening dollar causes US economic growth remains clouded. Investors seem to pile into the Japanese yen when risk aversion spikes, analysis are ambivalent about the near-term direction of the yen/dollar exchange rate. Therefore, it’s believed weaker dollar will manifest itself via European currencies.

In 1994, China devalued its currency and pegged it to the US dollar at around 8.3 yuan to the US dollar within an extremely narrow band that permits no more than infinitesimally small variations in the yuan-dollar exchange rates. Four years later, Malaysia fixed its exchange rate at 3.80 ringgit to the US dollar in the midst of the 1997/98 financial crisis.

Both China and Malaysia have increased their external reserves enormously. China’s reserves have swelled from US$143 billion in 1997 to US$578 billion in 2004, while Malaysia’s reserves have grown from US$21.7 billion to US$66.7 billion during the same period. It is quite obvious that the growing inherent strengths of the fundamentals of these two economies are not reflected in the exchange rates.

Although Malaysia with a small domestic economy but the weakening of dollar definitely harm Malaysian economic too as the exports value is greatly reduced in the US or in other economies tied to the dollar. Malaysian companies will face pressure on their export sales. But in deciding re-pegging, Malaysia seems to follow China's foot steps as China’s Renminbi and Malaysia’s ringgit have one thing in common: they are wedded to the US dollar.


Although it was said Malaysia has the capacity to determine the value of the ringgit because it has sufficient foreign currency and substantial savings, with the Employees Providence Fund alone holding more than RM200bil in its coffers, thus shouldn’t float the currency as the country would lose money if the currency is vulnerable to external forces.

Hypnotically, if Malaysia could strengthen the value of the ringgit by 10%, by pegging the ringgit to the US dollar, the import value should depreciate by 10%. When the price of imported goods is reduced, the impact would immediately be felt by consumers.

China today is very different from what it was in 1994. The Chinese economy has been growing at near-double digit rates year after year. As the second largest economy in Asia, any move by China on the yuan exchange rate will have far reaching impacts on other currencies, with serious financial and economic consequences.

Ironically, a $700bn bail-out for Wall Street is the US government’s political decision to commit such big amount taxpayer money to fixing the problem showed the seriousness economic crisis in US.

US have become increasingly erratic and unreliable on the world stage. The sinking US dollar definitely harm Malaysian economic, should the ringgit consider re-pegging, euro is the only one to be considered.

By and large, the ringgit exchange rate will be more flexible based on market condition and a managed float against a basket of currencies as it is now.