1. Fixed and Floating exchange rate
EXCHANGE RATE SYSTEMS FOR THE MALAYSIA SINCE 1990-2012
In a fixed exchange rate system, the government (or the central bank acting on the
government's behalf) intervenes in the currency market so that the exchange rate stays close to an
exchange rate target. For year 1990-1996 a managed float determined the ringgit exchange rate and
the capital account remained positive. Due to high offshore interest rates, foreigners had large ringgit
holdings, establishing liabilities for the Malaysian banking system. Thus, potential offshore
speculators had sufficient currency to destabilize the Malaysian banking system. The fixed exchange
rates system that used in domestic currencies’ exchange rates with the US dollar even appreciated
from 1990 to 1996. It is now widely believed that the adoption of the implicit dollar standard in many
Asian countries contributed to the Asian financial crisis.
From 1996-1997, the domestic currency were depreciated over the US dollar, so the property
and stock market bubbles in Malaysia burst. At the same time, the exchange rates in Asian countries
also experienced a drastic fall. The collapse of stock prices and exchange rates spread widely to all the
Asian countries.
In September 1998, after the exchange rate started appreciating, Malaysia implemented
capital controls and a pegged exchange rate to the dollar. These temporary polices helped to eliminate
0.0000
0.5000
1.0000
1.5000
2.0000
2.5000
3.0000
3.5000
4.0000
4.5000
Exchange rate (RM/USD)

2. transactions not related to trade and foreign direct investment, thus closing the offshore market,
suspending ringgit credit to foreigners and reducing outflows. Malaysia’s economy has remained
healthy and vibrant since moving to a pegged exchange rate system. The benefits of a fixed system
include highly effective fiscal policies, which can result in high domestic income and output with
fiscal expansion.
For the current practice the exchange rate, Malaysia is currently undergoing fiscal expansion
policies to help increase domestic income and hence spending. On July 21, 2005, Bank Negara
announced the end of the peg to the US dollar immediately after China's announcement of the end of
the currency Chinese peg to the U.S. dollar. According to Bank Negara, Malaysia allows the ringgit
to operate in a managed float against several major currencies. This has resulted in the value of the
ringgit rising closer to its perceived market value, although Bank Negara has intervened in financial
markets to maintain stability in the trading level of the ringgit Malaysia is continuing with its pegged
exchange rate, helping maintain stable interest rates and keeping inflation low.
Asian Financial Crisis 1997
The influence of financial crisis that occur in 1997 was started at Thai crisis in July 1997, and
Malaysia experienced serious devaluation of its currency. During the crisis, the market value of the
Malaysia ringgit had dropped to half of the pre-crisis level until January 1998. At the start of 1997,
the KLSE Composite index was above 1,200, the ringgit was trading above 2.50 to the dollar, and the
overnight rate was below 7%.
In July 1997, within days of the Thai baht devaluation, the Malaysian ringgit was "attacked"
by speculators. The overnight rate jumped from under 8% to over 40%.This led to rating downgrades
and a general sell off on the stock and currency markets. By end of 1997, ratings had fallen many
notches from investment grade to junk, the KLSE had lost more than 50% from above 1,200 to under
600, and the ringgit had lost 50% of its value, falling from above 2.50 to under 4.57 on (23 January
1998) to the dollar.
Malaysian moves involved fixing the local currency to the US dollar, stopping the overseas
trade in ringgit currency and other ringgit assets therefore making offshore use of the ringgit invalid,
restricting the amount of currency and investments that residents can take abroad, and imposed for
foreign portfolio funds, a minimum one-year "stay period" which since has been converted to an exit

3. tax. The decision to make ringgit held abroad invalid has also dried up sources of ringgit held abroad
that speculators borrow from to manipulate the ringgit, for example by "selling short."