Exchange rate and foreign exchange
The exchange rate is the price of one currency in terms of another. Foreign exchange is the foreign currency used for international transactions. A rate is usually quoted as how many Ringgit are needed to buy one unit of a foreign currency, for example RM4.70 to USD1.
Example
If the rate is RM4.70 = USD1, then to buy an imported good priced at USD100, a Malaysian trader must pay RM470.
Appreciation and depreciation
Appreciation happens when the Ringgit strengthens — fewer Ringgit are needed to buy a foreign currency (e.g. from RM4.70 to RM4.30 per USD1). Depreciation happens when the Ringgit weakens — more Ringgit are needed (e.g. from RM4.70 to RM5.00).
- When the Ringgit depreciates: Malaysian exports become cheaper to foreign buyers (exports rise), but imports become more expensive.
- When the Ringgit appreciates: imports become cheaper, but exports become dearer to foreign buyers.
Exchange-rate systems
Under a floating exchange rate, the value of a currency is set by market forces (demand and supply). Under a fixed exchange rate, the government or central bank pegs the value at a set level. A managed rate combines the two — the value is allowed to float but Bank Negara Malaysia intervenes when needed. The Malaysian Ringgit currently uses a managed float.
What affects the exchange rate?
The value of the Ringgit moves with the demand for it and its supply. Demand for the Ringgit rises when foreigners buy more Malaysian exports or invest here, pushing its value up. Conversely, when we import a lot or capital flows out, the supply of Ringgit rises and its value tends to fall. Factors such as commodity prices, interest rates and investor confidence also matter. A stable exchange rate is important for traders and investors because it affects the cost of imports and the earnings from exports.
Remember
A weaker Ringgit = cheaper exports for foreigners but dearer imports. Bank Negara Malaysia manages the value of the Ringgit.