Exchange for almost the period of 1998 to

Exchange rates are the amount of one currency that can
exchange for another. For example, the dollar’s exchange rate tells us how much
a dollar is worth in a foreign currency. Exchange rates are determined by
demand and supply. However, the governments can influence those exchange rates
in various ways.

Malaysia has practiced various exchange
rate system over the past four decades. The Malaysian Ringgit (RM) was
previously known as the Malaysia Dollar (M$). It was created in June 1967,
which was also used by Singapore and Brunei. The value of Ringgit was tied against
the pound sterling at par value of 0.290299 grams of gold. When the pounds
sterling was floated on 23 June 1972, the Malaysian government was undecided in
revaluing the ringgit, but later the government decided to switch to the US
dollar instead of the pounds sterling as its official currency in the foreign
exchange market. Those were a very risky move to set one country’s currency
upon another currency. Central Bank took an action to float the money by using
managed float system during the oil crisis in 1973 to avoid fluctuation in RM.
During the crisis, the US dollar became unstable and the inflation rate of
Malaysia were critical. The government or central bank can intervened in the
determination of the exchange rate within this system.

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 In
1975, the Malaysian Dollar officially changed to Ringgit Malaysia (RM), but
floating effective rate was replaced. The external value of the Ringgit was
determined based on the weighted basket of foreign currencies of Malaysia’s
major trading partners. The same exchange rate determination was constant until
the Asian Financial Crisis of 1997. During the crisis year, the overvalued
Ringgit depreciated sharply against the US dollar by more than 40%. To
stabilise the financial market, Malaysia imposed capital control and returned
to a fixed exchange rate that pegged to the US dollar at RM3.80 in September
1998.

Malaysia fixed the RM to USD for almost
the period of 1998 to 2005. This current year the currency of Malaysia are free
again. Even though it is free but it still not completely free. The ringgit is
free but not floating freely and it is now under managed float system. In
practice, most governments do intervene, as it is too risky to let their
currencies to be exposed to the changes of market forces, which tend to go
beyond. Yet it would cause a mistake to ignore the market signals. Managed
float system provides a consensus where one can have the benefit of exchange
rate flexibility without excessive instability.

As for China, before July 2005, this
country had historically adopted a fixed exchange rate system, with the CNY
being effectively ‘fixed’ to the US dollar at a sustainable rate of $1 equal to
8.27 yuan. After 2005, a new managed float system was launched with reference
to a basket of different currencies, allowing the CNY to fluctuate within a
fixed range of 0.3% based on the price issued by the People’s Bank of China
(PBoC). Managed float is also known as dirty float system which to ensure the
relative stability of the price of CNY and helped Chine generate huge amount of
trade surplus.

Between 1949 to 1970, the China’s highly
overvalued exchange rate was fixed by the state as part of the country’s
substitution industrialization strategy as part of the economic planning system
for the purpose of reducing its heavy depend on imports. The CNY was almost
inconvertible since the government placed strong exchange controls over the
money market. The over-valuation of the currency resulted in a lack of support
in domestic foreign trade companies, because the exchange rate faced by them
was significantly lower that the price they received on the international
market and for each transaction, a loss would be incurred if the company
attempted to convert their earnings into Renminbi.

The second stage of the exchange rate
systems is a dual-track system, which introduced in early 1980s, indicating a
period of economic transaction. The internal settlement rate of RMB2.8 to a
dollar, applied to all transactions, was significantly diverted from official
rate of RMB1.5 to a dollar. After the removal of this rate, the government
continued the CNY devaluation, and the value reached a bottom at RMB8.70 to a
dollar on January 1994. Since then, the CNY price was maintained at an
approximate value of RMB8.20 for a dollar with slight fluctuations until July
2005.

Since July 2005, a new exchange rate
system was launched in replacement of the former RMB price regard to US dollar.
The CNY was re-valued over 2.1%, using managed float system, allowing a
fluctuating range of 0.3% around the middle rate, was implemented with
reference to a basket of currencies. 

Exchange rates are the amount of one currency that can
exchange for another. For example, the dollar’s exchange rate tells us how much
a dollar is worth in a foreign currency. Exchange rates are determined by
demand and supply. However, the governments can influence those exchange rates
in various ways.

Malaysia has practiced various exchange
rate system over the past four decades. The Malaysian Ringgit (RM) was
previously known as the Malaysia Dollar (M$). It was created in June 1967,
which was also used by Singapore and Brunei. The value of Ringgit was tied against
the pound sterling at par value of 0.290299 grams of gold. When the pounds
sterling was floated on 23 June 1972, the Malaysian government was undecided in
revaluing the ringgit, but later the government decided to switch to the US
dollar instead of the pounds sterling as its official currency in the foreign
exchange market. Those were a very risky move to set one country’s currency
upon another currency. Central Bank took an action to float the money by using
managed float system during the oil crisis in 1973 to avoid fluctuation in RM.
During the crisis, the US dollar became unstable and the inflation rate of
Malaysia were critical. The government or central bank can intervened in the
determination of the exchange rate within this system.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


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 In
1975, the Malaysian Dollar officially changed to Ringgit Malaysia (RM), but
floating effective rate was replaced. The external value of the Ringgit was
determined based on the weighted basket of foreign currencies of Malaysia’s
major trading partners. The same exchange rate determination was constant until
the Asian Financial Crisis of 1997. During the crisis year, the overvalued
Ringgit depreciated sharply against the US dollar by more than 40%. To
stabilise the financial market, Malaysia imposed capital control and returned
to a fixed exchange rate that pegged to the US dollar at RM3.80 in September
1998.

Malaysia fixed the RM to USD for almost
the period of 1998 to 2005. This current year the currency of Malaysia are free
again. Even though it is free but it still not completely free. The ringgit is
free but not floating freely and it is now under managed float system. In
practice, most governments do intervene, as it is too risky to let their
currencies to be exposed to the changes of market forces, which tend to go
beyond. Yet it would cause a mistake to ignore the market signals. Managed
float system provides a consensus where one can have the benefit of exchange
rate flexibility without excessive instability.

As for China, before July 2005, this
country had historically adopted a fixed exchange rate system, with the CNY
being effectively ‘fixed’ to the US dollar at a sustainable rate of $1 equal to
8.27 yuan. After 2005, a new managed float system was launched with reference
to a basket of different currencies, allowing the CNY to fluctuate within a
fixed range of 0.3% based on the price issued by the People’s Bank of China
(PBoC). Managed float is also known as dirty float system which to ensure the
relative stability of the price of CNY and helped Chine generate huge amount of
trade surplus.

Between 1949 to 1970, the China’s highly
overvalued exchange rate was fixed by the state as part of the country’s
substitution industrialization strategy as part of the economic planning system
for the purpose of reducing its heavy depend on imports. The CNY was almost
inconvertible since the government placed strong exchange controls over the
money market. The over-valuation of the currency resulted in a lack of support
in domestic foreign trade companies, because the exchange rate faced by them
was significantly lower that the price they received on the international
market and for each transaction, a loss would be incurred if the company
attempted to convert their earnings into Renminbi.

The second stage of the exchange rate
systems is a dual-track system, which introduced in early 1980s, indicating a
period of economic transaction. The internal settlement rate of RMB2.8 to a
dollar, applied to all transactions, was significantly diverted from official
rate of RMB1.5 to a dollar. After the removal of this rate, the government
continued the CNY devaluation, and the value reached a bottom at RMB8.70 to a
dollar on January 1994. Since then, the CNY price was maintained at an
approximate value of RMB8.20 for a dollar with slight fluctuations until July
2005.

Since July 2005, a new exchange rate
system was launched in replacement of the former RMB price regard to US dollar.
The CNY was re-valued over 2.1%, using managed float system, allowing a
fluctuating range of 0.3% around the middle rate, was implemented with
reference to a basket of currencies. 

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