Malaysia says ringgit undervalued but rules out dollar peg

KUALA LUMPUR, Malaysia (AP) - Malaysia's central bank said Wednesday that the ringgit, which has plunged 14.4 percent against the U.S. dollar since September, was sharply undervalued but ruled out reintroducing capital controls.

The ringgit has slid to 3.70 to the dollar, making it Asia's worst performing currency so far this year. Expectations the U.S. Federal Reserve will raise interest rates this year for the first time since the global financial crisis have strengthened the dollar against most currencies.

Bank Negara Malaysia's governor Zeti Akhtar Aziz said the ringgit's depreciation was not surprising. It was due to the double whammy of Fed ending its bond purchases last year, which foreshadowed rising U.S. interest rates this year, and the plunge in oil prices. Malaysia is a net oil importer.

Even if the ringgit slides further, Zeti said Malaysia will not peg the ringgit to the dollar because it can cause an "extreme period of dislocation" and "pain" to the country.

In 1998, the ringgit was pegged at 3.80 to the greenback as part of capital controls to ward off speculators and lift the country out of the Asian financial crisis. The peg was scrapped in 2005.

Zeti said the ringgit will eventually recover given Malaysia's economic fundamentals such as a low employment rate, a resilient banking industry and high savings rate.

"At this stage, it is significantly undervalued," she told a news conference. "These good fundamentals would support a stronger currency."

The central bank will only intervene in financial markets to maintain "orderly" conditions and not to prop up the ringgit at any level, she said.

Zeti also said Malaysia's benchmark interest rate was still "accommodative to support growth", indicating no plans to cut rates despite a slowing economy this year.

Thailand's central bank on Wednesday cut its key lending rate, joining central banks in Europe, Japan, India, Australia and elsewhere in easing monetary policy to provide a boost to their sagging economies.

Malaysia's economic growth is forecast to ease to 4.5-5.5 percent this year, from 6 percent last year. Inflation however, is expected to be contained at 2-3 percent, Bank Negara said.