A selloff in some emerging-market currencies took another leg down on Monday, fueled by the prospect of higher interest rates in the U.S.
Malaysia’s currency, the ringgit, plunged to a nine-year low against the dollar before reversing course later in the day. Exacerbating weakness in the ringgit is heightened scrutiny of a debt-laden state investment fund that has run into difficulty finding cash to meet its obligations.
Other emerging-market currencies have also faltered in recent days. On Monday, Turkey’s lira tumbled to a record low against the greenback after the country’s ruling party failed to secure a majority in national elections. Following last week’s stronger-than-expected U.S. jobs report, the Indonesian rupiah hit its weakest level against the buck in almost 17 years, Mexico’s peso hit a record low against the dollar and South Africa’s rand plumbed its lowest level since late 2001, according to CQG.
The employment report solidified the expectations among many investors that the Federal Reserve will raise the short-term benchmark interest rate in the U.S. sometime this year—possibility as early as September. Higher rates dim the allure of emerging-market assets, and could potentially lead to losses as money managers recalibrate how much yield they should demand from the sector’s relatively risky stocks, bonds and currencies.
The prospect of even more financial-market turmoil spurred by a Fed rate increase has put officials in developing countries on the defensive as they seek to head off potentially disruptive capital outflows.
“Emerging-market currencies, including the ringgit, continue to be affected by uncertainties in the external environment,” Zeti Akhtar Aziz, Malaysia’s top central banker, told The Wall Street Journal in a written response to questions. “In this environment, the ringgit is now trading at levels that are not reflective of the fundamentals of the Malaysian economy.”
Last week, 1Malaysia Development Bhd., a state investment fund, came under investigation by the central bank in connection with its offshore borrowings and foreign investments. Late Monday, 1MDB said it had repaid some of its debt—a $975 million loan to a syndicate of international banks—and was committed to reducing debt levels.
Foreign investors hold a large chunk of Malaysia’s debt, which is considered safe and backed by an A-rating by Standard & Poor’s and similar ratings from other firms. But as the troubles unfold at 1MDB, which reports to Prime Minister Najib Razak and is charged with developing the economyinvestors are beginning to question whether the government can meet all of its potential obligations. In the week ended June 3, foreign investors pulled out $25 million from the country’s bonds and stocks, more than five times the amount the week before, the latest data show.
Dr. Zeti said the Malaysian economy is stronger now than it was during the Asian financial crisis of the late 1990s. Growth “has also been driven by private demand, underpinned and supported by a strong banking system and well-developed financial markets,” she said.
In Malaysia’s bond markets, yields have surged on government debt as prices have dropped and the stock market is languishing at its lowest level since January.
Analysts expect the ringgit to remain one of the region’s underperformers. “Malaysia always moves much more violently than others in the region,” said Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong.
Earlier this year, Fitch Ratings said it could downgrade Malaysia’s sovereign ratings. Moody’s Investors Service and S&P have kept the country’s debt at investment grade.
While noting the exchange rate is “not an instrument of monetary policy nor a tool to gain competitiveness,” Ms. Zeti said, “the bank however stands ready to maintain orderly conditions in the foreign-exchange market.”
The ringgit traded as weak as 3.7756 against the U.S. dollar on Monday, according to CGQ, before paring losses to end slightly higher at 3.7580. One dollar bought 3.7609 ringgit in late New York trading on Friday.
To be sure, the dollar faded broadly on Monday. The greenback weakened against many other emerging-market currencies, such as the Brazilian real.
Against the Japanese yen and the euro, the dollar slumped as investors cashed in on large gains notched on Friday following the U.S. jobs report.
The dollar weakened 1.6% against the common currency, as one euro bought $1.1293 in late-afternoon trading, reversing the buck’s gain on Friday. The dollar lost 0.9% against the yen, to ¥124.48, yet remained near its highest level since May 2002.
—James Ramage contributed to this article.
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