the __earthinc

My opinion on the pegged Ringgit; I’ll break it up into the short run and into the long run.

In the short run, I believe the ringgit should be pegged. Reason is, for the past six months, the USD has consistently been growing weaker against the Euro and the Yen. A weaker real exchange rate will make foreign goods expensive while domestic products cheap. This makes domestic products to be competitive because of its lower price. In a way, it helps to improve the trade balance. While the above effect happens to the USD, the Ringgit is pegged against the US and thus, the same thing affects the Ringgit.

In the long run however, expensive foreign goods will hurt import and certain industries that depend on import. Furthermore, Malaysia is trading with other countries. A pegged Ringgit simply implies pegging the Ringgit against the USD, not against every currency. Though the exchange rate to the USD will stay the same, the same case is not true with the Euro, Japanese Yen, Singaporean Dollar, Aussie Dollar etc. And import come not just from the US. It comes from other part of the world. Ringgit should be floated or risk seeing some industries reduces its size.

Plus, as students in the US, I do not feel the heat of the pegged dollar. After all, the same quantity of Ringgit in almost five years ago is needed to buy the same amount of Dollar today. Yet, imagine the Malaysian students in Japan, Australia – anywhere where the USD is not used for local transaction. Their cost of living increases simply because the exchange rate is falling down. And this increase is sharp. If these students rely on scholarship from Malaysia (from some entities or parents), the cost of transaction due to the real exchange rate is high.

Therefore, if my logic is right and if the USD failed to regain part of its former strength, I believe Ringgit should be floated in the near future. A good trade balance is worthless when local industries suffer. A pegged Ringgit was a good solution in the days immediately after the Asian Financial Crisis, not forever.

Of course, the underlying reason why I support the floatation of Ringgit is the fact that my sister is going to the land of Down Under. I don’t want my parent to be spending too much because of the intangible real exchange rate.

Alan Greenspan declares that he won’t interfere with the declining dollar strength. His refusal to step in is somewhat comprehensible since a weaker dollar will make American made products more competitive – American products will be able to sell at a cheaper price abroad. This however makes foreign products more expensive and thus forcing American import to fall – a sort of an implicit tariff imposed on import. And understandable, this irritates other trading countries, especially the European Union.

Recently, a G7 meeting was held in Roca Raton, Florida and one of the main focuses was the free fall of the dollar against other major currencies, notably the Euro and the Yen. The US refusal to control the dollar rate came under fire but somehow, the US diplomats managed to divert the attention given to them. Instead of criticizing a country sandwiched between the Pacific and the Atlantic, the G7 stared at Japan and other Asian nations. The final statement issued by the G7 was:

Excess volatility and disorderly movements in exchange rates are undesirable for economic growth (AFP, Feb 8)

However, the following statement was stressed:

We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the financial system, based on market conditions (AFP, Feb 8)

The statement, in spite of it was supposed to be directed at the US monetary policy, is simply amazing. I am simply astounded by how the final statement was worded in such a way that it shifts its attention from the issue of volatility to the lack of flexibility.

Despite the seemingly unified statement by members of the G7, the European members are dissatisfied with the statement. Japan has also shrugged off the criticism from the G7 by stressing on G7’s volatility statement. China and South Korea meanwhile agree with Japan. I haven’t heard anything from Malaysia but knowing that the Malaysian ringgit is also being pegged to the dollar like the renminbi, Malaysian central bank, the Bank Negara should be joining their northern colleagues.

On the other side of the fence, some bankers argue that the weakening dollar strength does not matter in the long run. Well, of course it doesn’t matter because, like what John Maynard Keynes had said almost a century ago, in the long run, we are all dead.

p/s – Hah! just received a warning from Michigan’s ITD for not voluntarily using their new transfer protocol. I want my freedom! LOL!