Ringgit extends monthly losses as 1MDB scandal hurts sentiment

[KUALA LUMPUR] Malaysia's ringgit dropped for a third month and reached a 16-year low as a political scandal linked to a state investment company weighed on investor sentiment already flagging from a slump in oil.

A multiple probe into the finances of debt-ridden 1Malaysia Development Bhd spurred demand for the relative safety of government bonds, with a Bloomberg index of local securities rising for a seventh month. The ringgit is Asia's worst- performing currency this year and foreign-exchange reserves have declined to the lowest level since 2009 on suspected central bank intervention to stem the losses.

"Negative sentiment surrounding the recent political developments has weighed on the ringgit," said Khoon Goh, a strategist at Australia & New Zealand Banking Group Ltd. in Singapore.

"Growing concern over the country's reserves is also partly behind the weakness." The ringgit weakened 0.2 per cent Friday and 1.4 per cent this month to 3.8250 a dollar as of 3:42 pm in Kuala Lumpur, prices from local banks compiled by Bloomberg show. It fell to 3.8260 earlier, the lowest since 1998 during the Asian financial crisis.

Forward contracts are signaling further weakness toward 4 per dollar. Malaysia's central bank is discouraging local and foreign financial institutions from entering into transactions that would result in selling the ringgit, the Star reported on Friday, citing dealers it didn't identify.

Twelve-month non-deliverable forwards fell 2.9 per cent in July to 3.9929 after Prime Minister Najib Razak sacked his deputy on Tuesday as he seeks to head off a public rift within the Cabinet amid allegations in a Wall Street Journal report that money linked to 1MDB found its way into his accounts, a claim he refutes. Also removed this week was the attorney general helping head one of the four probes.

Malaysia's government bonds returned 0.4 per cent in July, the Bloomberg index shows. The 10-year yield rose seven basis points during the month to 4.09 per cent and the five-year yield dropped two points to 3.62 per cent, according to Bursa Malaysia prices.

BLOOMBERG