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NEWS UPDATES Asean Affairs        3 February 2011

Malaysia ringgit unlikely to return to Pre-1997 Level

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The ringgit's gradual uptrend against the US dollar is expected to continue this year but for the Malaysian currency to return to its pre-1997/98 Asian financial crisis level of about 2.50 is considered unlikely.

"We have a year-end target of 3.0 ringgit versus the US dollar but it may hover around 3.15 in the second quarter amid some weaknesses overall for Asian currencies," said Bank of America Merrill Lynch's head of Emerging Asia Foreign Exchange and Fixed Income Strategy, Claudio Piron.

He cautioned that sovereign default risks in Europe and an exit of the US from its second round of quantitative easing would serve as a potential speed breaker.

In an interview he said: "It is no secret that emerging markets in Asia have been popular with international investors since last year and consequently, the region has seen a lot of inflows.

"And there is a risk of a little bit of exit in the second quarter."

It was expected that the ringgit would slide a little in the second quarter before strengthening to the 3.0-level toward the year-end, he said, adding that the local unit was currently 2.2 percent overvalued.

Since the beginning of the year, the local unit has appreciated about 1.28 percent while the Korean won 1.9 percent and Taiwan dollar 4.04 percent.

Last year, the local unit jumped 12 per cent against the greenback.

Going forward, Piron said it was unlikely for the ringgit to reach its pre-1997/98 Asian Financial crisis level anytime soon but it could happen in three to five years.

For the currency to strengthen that much within the next 12 to 18 months, he said, there should be a fundamental crisis in developed markets and a significant sovereign default in Europe but such a scenario was far fetched as the debt situation in the US was still manageable.

On inflation, he said that typically, Asian central banks were behind the curve. However, it did not mean bad because the situation was partly the consequence of exogenous inflation and not necessarily due to demand within Asia.

Among all, he said, Bank Negara Malaysia (BNM) was the most proactive central bank in the region.

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