Bank Negara today announced that the Malaysian Ringgit peg of RM3.80 to the US dollar has been abolished with immediate effect. The central bank's governor, Zeti Aziz, made the announcement in Kuala Lumpur this evening.

A statement from Bank Negara later said 'the exchange rate of the ringgit with immediate effect will be allowed to operate in a managed float, with its value being determined by economic fundamentals'.

The central bank will monitor the exchange rate against a currency basket to ensure that the exchange rate remains close to its fair value. Promoting stability of the exchange rate continues to be a primary objective of policy, said the statement further.

"Changes in the international and regional financial and economic environment have made it important for Malaysia to have a stable exchange rate against its major trading partners, in particular, the regional countries.

"Consequently, the stability of the ringgit exchange rate against the regional currencies will become increasingly important. Such stability can best be achieved by maintaining the value of the ringgit against a trade-weighted index of Malaysia's major trading partners," the statement added.

'Good for economy'

Bank Negara said taking into consideration developments in Malaysia's trading partner countries, the exchange rate - after shifting to this new system - was not expected to 'deviate significantly' from the current levels.

Prime Minister Abdullah Ahmad Badawi, met at the Umno annual general assembly in Kuala Lumpur, said the abolishment of the peg would be good for all sectors.

"I believe that the exchange rate would be stable and I don't think that there would be too much
volatility. It would be good for the economy and for the market.

"It would be good for all sectors," he told reporters. Asked on what he thought the new exchange rate would be, the prime minister said it would be decided by market forces.

"I don't know. It would be decided by the market fundamentals but I don't think that it would be far from the present rate."

China drops peg too

Abdullah said the decision to abolish the peg was made following changes in the region's currency situation.

"The situation in the region has suddenly moved in a very fundamental way and we therefore decided to make this decision on the exchange rate,"

The prime minister was referring to China's earlier decision today to drop the yuan's peg to the US dollar.

The Chinese central bank had announced that the yuan's 11-year peg to the dollar would be scrapped in favour of one against a basket of currencies.

Under the new exchange rate mechanism, one dollar is valued at 8.11 yuan compared to the old rate of 8.2765 yuan, effectively a 2.1 pct revaluation.

Foreign reserves up

The move by the Malaysian government, meanwhile, confirms the views of speculators who bet that the country would bow to growing pressure to review the peg to the shrinking US dollar.

Foreign cash has been pouring into the country, hiking foreign reserves by 19 percent or RM40.7 billion (US$10.7 billion) in the fourth quarter of last year alone, Barclays Capital noted in a research paper recently.

Estimates of the ringgit's fair value by banks and research houses range from RM3.30 to the dollar to RM3.60, rather than the currently pegged RM3.80.

The Malaysian government, against advice from the International Monetary Fund, pegged the value of the ringgit to the US dollar on Sept 1, 1998.

The measures were implemented to eliminate offshore trading in the ringgit and insulate the economy from the effects of short-term speculative capital flows which triggered the 1997/98 Asian financial crisis.