Recently report said that the Malaysian Ringgit is expected to rise further against the U.S dolar (U.S). Ringgit start to strengthen in the first quarter and the last quarter of 2010 when they substantially weakened at the year 2009. Thus, the present performance indicates the improvement of the country's economic condition. I have been curious all the time and been asking how does the currency value rise and decline. I am not an economic analyst but here I got after I done several readings and researches. I could generalized it in several factors:-
1. Instability Based on Supply and Inflation
One factor that affects on how a given currency's rise and fall is the amount a given currency in circulation and relative inflation. Currency in circulation which also know as "currency in hand" means physically used to conduct between the and businesses rather than stored in a bank, financial institution or central bank. For example, if a country begins printing money, the value of a currency is diluted due to inflation, so its value will fall relative to other world currencies. If a large amount of the money supply were somehow burned up, it would have the reverse effect. Easy to say the more you print the money, the lesser the value of the money.
2. Alteration of Value Based on Demand
Like all markets, currency is affected by both its supply and demand. The desirability, or demand for a given currency also results in changes to its value. The more foreign countries want to hold a certain currency, the more it is worth, and the less they want it, the less it is worth. There are many factors that affect demand for a currency, such as interest rates between countries, political factors, expectations and trade balance. For instance, if you knew a certain country was going to enter a costly war, which might result in the collapse of its government, you would probably want to get rid of any currency you had from that country, and the value of its currency would consequently fall. In general, live exchange rates are a reflection of one currency's desirability versus another at a given point in time.
The issues that happened in Malaysia, to those who are familiar in the field of economic and finance has increased their concern in the ringgit currency. They were forecasting the USD will continue to decline. So, tribes of fund managers that have a fund take an action to invest billions in other currencies including the ringgit Malaysia. Tun Dr. Mahathir has given a warning toward this issue so that Malaysia be aware of the foreign fund managers that come and nonstop hitting the index points to rise over 1500. It is their job. They come to continue buy, buy and buy. When the index growing up later, there are the possibility to occur an unexpected problem to the retail investor. As they are continuing to buy, the fund managers also continuing to sell, to sell and to sell until the stock price fall. Finally, the retail investors which they could not manage the profit from the stock price lead them to bankruptcy.
3. Purchasing Power
Purchasing power is a term used in economics that is defined as the amount of goods and services that can be purchased with a given amount of currency. It is an important in economic deliberation when determining the cost of living and standard of living in different countries. Because in the perfect market, the purchasing power of one currency would be the same as another currency. Which is a consumers are able to buy the same bundle of goods in one country, that he would also be able to by exchanging his money and buy it in the another country. This ideal of exchange rate rarely to happened. Besides, there are many factors that influenced to the perfection of the idea. Such as, trade barriers, imperfect competition and prices that do not immediately adjust to reflect a change in a currency's value. That why when traveling to certain countries can seem very cheap, while sometime can be expensive. When a currency has a greater purchasing power relative than other, the currency are said to be undervalued, while the less purchasing power are considered as overvalued. For instance, let assume if someone buy an iPhone about RM2500 in Malaysia, and iPhone in United State cost $840. But the person in United State can purchased almost 3 iPhones for every dolar. So, it is said that the Malaysian ringgit is overvalued because he can't buy as many iPhone with ringgit as he can do in United State.
