When opining on the strength of the Malaysian ringgit, many implicitly use the US dollar as a benchmark. That has caused some people to overstate the relevance of trends generated by the two currencies to the Malaysian economy while missing out the bigger picture altogether.
The United States is an important export destination for Malaysian goods and this is why the MYR-USD exchange rate receives the special attention in the public sphere. However important it might be, trend associated with movement of the rate blurs out the actual meaning of changes of the rate.
There are a number of factors that affect a currency’s strength but essentially, it comes down to capital flow. An inflow strengthens the currency and an outflow does otherwise. The MYR has been strengthening against the USD ever since the pegging of the former currency to the latter was removed back in July 2005. Meanwhile, the USD has been slacking against various currencies, including against the MYR. If the MYR and the USD were the only currencies in the world, one would assume that capital is flowing from the US to Malaysia. The issue is that there are more than two countries in this world.
One will reach the same assumption, albeit wrongfully, if one concentrates on the MYR-USD exchange rate alone. Through that, it is easy to get a feeling that the MYR is appreciating in general. Coupled with the perception that a strong currency is a good currency — a strong currency is not necessarily a good thing; it depends on the composition of the economy; an export-oriented country would hate a strong currency — among lay observers of local economy and politics, it contributes to a kind of unfounded optimism.
It is unfounded because not all of the strengthening of the MYR against the USD is caused by attraction that the Malaysian economy creates. Part of it is contributed by uncertainties in the US economy which has nothing to do with the Malaysian economy. On top of that, not all of the capital that flows out of the US economy is flowing into Malaysia. There are other countries out there but yet, a lot of laypersons seem to overlook that fact.
The truth is that while the MYR has been strengthening against the USD, it has not really shown the same trend against our other major trading partners like Singapore and Japan. The USD on the other hand has been growing weaker against a majority of other currencies.
The USD can become weaker against the MYR if capital flows out of the US to a third country. In other words, the MYR can appreciate against the USD without the Malaysian economy doing anything positive. Indeed, with enough outflow from the US economy to a third country, the MYR could appreciate against the USD even when the Malaysian economy is bleeding to death!
So, I guess what I am trying to say is that please do not measure the strength of the MYR solely against just the USD and then make a conclusion about the Malaysian economy. Instead, take a basket of currencies or more precisely, currency of Malaysia’s main trading partners. The latter method will help anybody to arrive at a more accurate conclusion than the former method will ever allow.