Ringgit slumps to seven-week low on oil as 1MDB payment looms

[KUALA LUMPUR] Malaysia's ringgit fell to a seven-week low after the dollar strengthened and oil prices tumbled ahead of a deadline for a bond interest payment by a troubled state investment company.

The ringgit dropped 1 per cent to 4.0553 per dollar as of 9.55am in Kuala Lumpur and earlier reached 4.0585, the weakest since March 22, according to prices from local banks compiled by Bloomberg. The currency is leading losses in Asia this quarter after outperforming the region in the first three months.

Brent extended declines Tuesday after sinking 3.8 per cent overnight, casting doubt over the sustainability of a recent rebound in energy prices and reviving concern about Malaysia's oil export earnings. 1Malaysia Development Bhd, which defaulted on a bond last month, faces a semi-annual interest payment of about US$52.4 million on another security on Wednesday.

"Most people are short dollars and as the prices go against them they get squeezed out and so they have to get out of these positions," said Sean Yokota, the head of Asia strategy at Skandinaviska Enskilda Banken in Singapore. "The strong dollar is pushing oil prices lower. I still do see the ringgit weakening toward 4.2 by year-end."

A gauge of the greenback climbed for a sixth day after recent comments from Federal Reserve officials suggested interest rates will rise this year. New York Fed President William Dudley said in a New York Times interview that it's "reasonable" to expect two US rate increases in 2016.

The yield on 1MDB's 5.99 per cent 2022 notes on which the interest payment must be made on Wednesday rose 20 basis points in the past week to 5.76 per cent. Malaysia's contingent liability under the default could amount to about US$7.5 billion, or 2.5 per cent of 2015's gross domestic product, Moody's Investors Service said in a report in April.

The cost to insure the nation's sovereign debt using five- year credit-default swaps has climbed to 161 basis points from 119 a year ago, CMA prices show. The yield on 10-year bonds climbed two basis points on Tuesday to 3.92 per cent, according to prices from Bursa Malaysia. That's the highest in eight weeks.

BLOOMBERG