History
In 1837 the Indian rupee was made the sole official currency in the Straits Settlements, but in 1867 silver dollars were again legal tender. In 1903 the Straits dollar, pegged at two shillings and fourpence (2s. 4d.), was introduced by the Board of Commissioners of Currency for the Straits Settlements and private banks were prevented from issuing notes. Since then, there were two lapses in the continuity of the currency, first by the Japanese occupation (1942–1945), and again by the devaluation of the Pound Sterling in 1967 when notes of the Board of Commissioners of Currency, Malaya and British Borneo lost 15% of their value.
On 12 June 1967, the Malaysian dollar, issued by the new central bank, Central Bank of Malaysia, replaced the Malaya and British Borneo dollar at par. The new currency retained all denominations of its predecessor except the $10,000 denomination, and also brought over the colour schemes of the old dollar.
In 1985, following the "Plaza meeting" of G-5 finance ministers in New York City, the US dollar fell sharply causing major losses in Central Bank's dollar reserves. The bank responded by starting a program of aggressive speculative trading to make up these losses.[8] Jaffar Hussein, the Central Bank Governor at the time, referred to this strategy as "honest-to-God trading" in a December 1988 speech in New Delhi.
In the late 1980s, Central Bank, under Governor Jaffar Hussein, was a major player in the forex market. Its activities caught the attention of many; initially, Asian markets came to realise the influence the Central Bank had on the direction of forex market. Alan Greenspan, the Federal Reserve's chairman, later realised BNM's massive speculation activities and requested the Malaysian central bank to cease those activities.
On 21 September 1990, BNM sold between $500 million to $1 billion worth of pound sterling in a short period of time, driving the pound down 4 cents to the dollar.[8] In response, bankers began front running the Central Bank's orders. Two years later on Black Wednesday, BNM attempted to defend the value of the British pound against attempts by George Soros and others to devalue the pound sterling. George Soros won and BNM reportedly suffered losses of more than US$4 billion.[9] The Central Bank lost an additional $2.2 billion in speculative trading a year later. By 1994, the bank became technically insolvent and was bailed out by the Malaysian Finance Ministry.[8]
Pegging of the ringgit and reserves
In 1998, Central Bank pegged RM3.80 ringgit to the US dollar after the ringgit substantially depreciated during the 1997 Asian financial crisis. In July 2005, the central bank abandoned fixed exchange rate regime in favour of managed floating exchange rate system an hour after China floated its own currency. This resulted in capital flight of more than US$10 billion, thought to be due to the repatriation of speculative funds that entered the country in anticipation of the abandonment of the peg: Central Bank's foreign exchange reserves increased by $24 billion in the one-year period between July 2004 and July 2005 (see table below). During this period there was widespread belief that the ringgit was undervalued and that if the peg was removed, the ringgit would appreciate.
The Central Bank continues to run a negative interest rate differential to the USD. The ringgit has appreciated gradually since the peg was abandoned and as at 28 May 2007, it traded at around RM3.40 to the US dollar. Malaysia's foreign exchange reserves have increased steadily since the initial capital flight, and as at 31 March 2007 the reserves stood at approximately US$88 billion, which is approximately $10 billion more than the reserves just prior to the peg being abandoned.
On 31 July 2007, the Malaysian reserves stood at approximately US$98.5 billion, which is equivalent to RM340.1 billion. The figure increased to US$101.3 billion on 31 December 2007, which is equivalent to RM335.7 billion. Central Bank's international reserves increased further 15 days later to US$104.3 billion or RM345.4 billion.[10]
