What are some factors that determine the exchange rate for Malaysian Ringgits?


Quick Answer

Factors that determine the exchange rate for Malaysian ringgits include public debt, inflation, economic growth, trade and political and economic stability. Exchange rates can also be influenced by international factors such as interest rate differentials, according to Investopedia.

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Full Answer

Like other currencies, a variety of local and international factors influences the exchange rate of the Malaysian ringgit. A major factor includes public debt; when a country builds up a large public debt, its currency exchange rate can drop as investors begin to lose interest in purchasing bonds from that country. Large public debts lead to high inflation, which reduces the value of bonds over time. An example of how public debt affected the ringgit is the currency's fluctuations in 2015, which were largely driven by large amounts of borrowing on the part of Malaysia's central bank.

Interest rates also play a large role in currency exchange rates. When interest rates are higher, investors receive a higher rate of return on their investments. Therefore, countries with higher interest rates tend to be more attractive to investors. Interest rates in other countries can affect local exchange rates, as local investors often pull their local investments in favor of a country with a higher rate. In the case of Malaysia, news of potential interest rate rises in the United States helped drive the ringgit's instability in 2015, as reported by The Malay Mail.

Stability is a very important part of a currency's value. Political and economic stability drives down exchange rates in many cases. Malaysia's political scandals helped contribute to fluctuating values of its currency in 2015.

Economic growth and trade are also factors that influence currency performance. High levels of employment, expanding economies and a balance between exports and imports can cause a currency's value to rise.

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