Ringgit Losses Throw Back to 1998 as 1MDB Probes Spread to U.S.

  • Ten-year bond yield posts biggest weekly rise of this year
  • China slowdown compounds ringgit's oil-related declines

The ringgit posted its biggest weekly decline since a 1998 dollar peg and bonds plunged as a report that a Malaysian state investment company is being investigated in the U.S. exacerbated losses from a slowdown in China and tumbling commodity prices.

The currency weakened beyond 4.39 against the greenback on Friday for the first time since the Asian financial crisis prompted Malaysia’s central bank to implement capital controls. 1Malaysia Development Bhd. is being probed by the U.S. Federal Bureau of Investigation over money laundering, while the U.S. Justice Department is looking into property purchases associated with Prime Minister Najib Razak’s stepson, according to reports from the Wall Street Journal and New York Times over the past week.

“Political noise is elevated,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “The fears of a China hard-landing remain a negative, and as long as that’s the case, risk-off prevails.”

The ringgit dropped 0.9 percent to 4.3855 a dollar in Kuala Lumpur on Friday and earlier fell to 4.3945, according to prices from local banks compiled by Bloomberg. It declined 4.1 percent for the week. The FTSE Bursa Malaysia KLCI Index of shares retreated 3.3 percent from Sept. 18, its worst week in more than a month.

Former premier Mahathir Mohamad imposed a fixed exchange rate of 3.8 a dollar in 1998 after the currency plunged 35 percent the previous year in the wake of a devaluation in the Thai baht. The peg stood until July 2005.

Multiple Probes

The currency has declined 26 percent in the past 12 months, Asia’s worst performance, as Brent crude prices that have halved in that time weighed on earnings for the region’s only major net oil exporter. China, Malaysia’s biggest trading partner, is heading for its slowest annual growth in more than two decades and markets are focused on the impact that may have on the global economy.

While Federal Reserve Chair Janet Yellen indicated on Thursday that she supports a U.S. interest-rate increase this year, the central bank cited China concerns when it refrained from tightening monetary policy last week.

1MDB, whose advisory board is chaired by Najib, came under the spotlight last year due to its rising debt, drawing criticism from opposition lawmakers and calls for the premier to step down. An investigation by the Malaysian Anti-Corruption Commission revealed about $700 million that found its way into Najib’s bank accounts was from political donations and not related to 1MDB -- the accounts were closed in 2013.

The FBI is probing allegations of money-laundering related to 1MDB, the Wall Street Journal reported, citing people familiar with the matter. The U.S. Justice Department has begun an investigation into U.S. properties purchased by shell companies belonging to Najib’s stepson and the funds that appeared in the premier’s accounts, the New York Times reported.

Malaysia’s sovereign bonds declined this week, with the 10-year yield rising 24 basis points to 4.37 percent, according to prices from Bursa Malaysia. That’s the biggest weekly increase for a benchmark of that maturity this year. Five-year credit-default swaps insuring the nation’s debt fell six basis points to 218 on Friday after reaching 221 earlier, the highest level since 2009, CMA prices show.

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