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February 24th 2005

Malaysia considers floating exchange rate

Malaysia’s currency, the Ringgit, is currently pegged to the dollar. Some officials feel it may be undervalued by as much as 12%; accordingly, it may soon allow the currency to float. Economists are forecasting the dollar could decline an additional 30% in the short-term, which would actually leave the Ringgit overvalued, relative to the rest of the world’s currencies. To make matters worse, it looks like the global economy will recede in 2008, which gives Malaysia only a few years to un-peg the Ringgit. Failure to do so, could exacerbate the effects of such a global recession on the Malaysian economy. At this point, Malaysia has two options. It could either un-peg the currency and allow to float completely, or instead gradually adjust the peg until the Ringgit stabilizes at its fair value. reports:

"We still have a lot of reserves to defend the peg because it is undervalued. But this will not work well if the currency is overvalued. As such, the ringgit must be allowed to appreciate gradually," said the executive director of the Malaysian Institute of Economic Research.

Read More: Earlier de-pegging of ringgit will avoid painful adjustment in 2008

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Posted by Adam Kritzer | in Exotic Currencies, Investing & Trading | 1 Comment »

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