Introduction

What is depreciation of currency? It’s a decrease in the level of a currency in a floating exchange rate system due to market forces. Currency depreciation can occur due to any number of reasons – economic fundamentals, interest rate differentials, political instability, risk aversion among investors and so on. Countries with weak economic fundamentals such as chronic current account deficits and high rates of inflation generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But abrupt and sizeable currency depreciation may scare foreign investors who fear the currency may fall further, and lead to them pulling portfolio investments out of the country, putting further downward pressure on the currency.
Last year 2013, Malaysia had faced the depreciation of Ringgit Malaysia. The Malaysian ringgit plunged to its lowest level in over three years on Thursday amid the brutal sell-off across emerging market assets, and strategists say the pain may not be over for the currency.
The ringgit has declined 10 percent against the U.S. dollar since late-May on concerns over a potential capital flight from the country's government bond market in favour of rising U.S. Treasury yields. Before closing on Wednesday 3 December, the ringgit dropped to as far as 3.4455 to the US dollar – the weakest it has been since February 2010. The ringgit had its largest two-day depreciation since the 1997-98 Asian financial crisis, falling 2.4% to 3.4300 to the US dollar on Monday 1 December at closing, from 3.3465 per US dollar on Thursday 27 November at closing.
What has caused the ringgit Malaysia to drop? Its reported that the depreciation is a ripple effect and “reflection of the absolute collapse in oil.” As oil is one of Malaysia’s main exports, the