Ringgit slumps to nine-year low as funds exit on Fed rate bets

© Bloomberg Malaysian ringgit banknotes of various denominations are arranged for a photograph in Kuala Lumpur, Malaysia, on Monday, Sept. 2, 2013. Malaysia’s ringgit dropped the most in Asia on speculation that outflows will accelerate…The ringgit slid to a nine-year low after a U.S. jobs report beat forecasts, backing the case for the Federal Reserve to start tightening monetary policy as money flows out of Malaysian stocks.

The dollar rose against 13 of the world’s 16 major currencies on Friday after data showed U.S. employers created 280,000 positions in May, the most in five months and exceeding the median estimate in a Bloomberg survey for a 226,000 gain.

“Strong U.S. non-farm payrolls sent the dollar rallying across the board,” said Khoon Goh, a Singapore-based senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. “Last Friday’s disappointing Malaysian export data is also pressuring the ringgit.”

The currency weakened 1.4 percent to 3.7720 versus the greenback in Kuala Lumpur, the biggest drop in Asia, according to data compiled by Bloomberg. It earlier fell to 3.7743, the lowest level since January 2006 and close to the 3.8 level at which it was pegged until 2005.

Twelve-month non-deliverable ringgit forwards declined 0.4 percent to 3.8788 as of 5:38 p.m. local time, after depreciating to 3.8840, the lowest in more than a decade.

Malaysia imposed a fixed exchange rate in 1998 as part of capital controls imposed under former Prime Minister Mahathir Mohamad at the height of the Asian financial crisis. The currency tumbled 35 percent the previous year as the Thai baht was devalued. Speculators drove the ringgit to a record low of 4.885 a dollar in January 1998.

Mahathir banned trading of the ringgit outside the country, blaming U.S. billionaire George Soros and other “rogue speculators” at the time for pushing down the currency.

Critical 3.8

Malaysia is vulnerable to outflows spurred by higher U.S. interest rates as central bank data show global funds hold 32 percent of the nation’s government bonds, compared with 18 percent for Thailand. Overseas investors sold a net 2.5 billion ringgit ($663 million) of the nation’s shares last month, stock exchange data show.

Foreign reserves have climbed to $106.4 billion after falling to $105.1 billion in March, the lowest level since 2010 and below the 10-year average of $112.42 billion.

“If the U.S. dollar continues to strengthen, then there is a chance of the ringgit reaching 3.80,” said Goh. “I do not expect Bank Negara Malaysia to be active in preventing this from happening, given the rundown in reserves since August.”

The nation’s exports dropped 8.8 percent in April from a year earlier, worse than the median estimate of economists for a 5.5 percent contraction. The trade surplus shrank to 6.89 billion ringgit from 7.82 billion ringgit.

Bonds Fall

The government is looking to narrow the fiscal deficit to 3.2 percent of gross domestic product this year from 3.5 percent. The current-account surplus climbed to 10 billion ringgit in the first quarter, the biggest excess since the three months ended June.

“I can’t comment on specific movements or fluctuations,” Economic Planning Minister Abdul Wahid Omar told reporters Monday in Kuala Lumpur, when asked to comment on the ringgit’s slide. “We will continue our efforts to reduce the fiscal deficit, manage our government debts and look at our current- account surplus.”

Sovereign bonds declined, with the 10-year yield rising eight basis points to 4.16 percent. That’s the highest for a benchmark of that maturity since January. It climbed 16 basis points last week amid a global selloff of debt.