Chapter 1: Introduction

1.0 Introduction

As the world develops and getting more integrated, business trading or even international trading has became a very common activity. Currency or most commonly known as money is use or circulation to pay in exchange for goods and services, money are use as a medium of exchange. There are two kinds of money form, the banknotes and the coins. Banknotes are more commonly used because of its convenience. Money is indeed a very important invention in human kind history.

As times goes by, more and more different kind are introduced by countries and these different currency are controlled and printed by their national banks. As the world getting more integrated, the relationship of these currencies is getting more complicated. The dominating currencies include the US dollar, British Pound Sterling and the Euro Dollar.

Malaysia is a developing country located at the South East Asian; Kuala Lumpur is the capital city for Malaysia. Malaysia has gain independent from the British colonist in the year 1957. In 1967, the National Bank of Malaysia had introduced the Malaysia dollar and it had been using it as the official currency to trade in Malaysia. During the decades, the currency had developed and minor changes were made. Now, the currency is already known as the Ringgit Malaysia (RM).

Ringgit Malaysia (RM) had always been stable and developing during the course of decades. However, during the Asian currency crisis, Ringgit Malaysia (RM) was badly affected and the volatility of the currency is severe. Due to the effect of the Asian currency crisis, the Ringgit Malaysia (RM) is fluctuating between 3.80 and 4.40 a US dollar. The Malaysia currency was implying the floating rate regime until end of 1998, the government of Malaysia decided to peg Malaysian Ringgit to US dollar at a rate of RM3.80 to a US dollar.

In this research, a study will be conduct with a topic of “The determinants of exchange rate in Ringgit Malaysia.” In this chapter, brief explanation will be done for background of study, problem statement, research question, research objective, significant of study and outline research. The other chapters of literature review, data and methodology, data analysis and also conclusion.

For Malaysia, exchange rate is one of the most important factors affecting the development of the countries’ economy. It will influence the interest of investors because exchange rate risk plays will affect the profitability of their investments. Many studies had on exchange rate but very little is about the Ringgit Malaysia. However the factors influence the movements of Ringgit Malaysia that will be discussed in this research are Inflation rate, Interest rate, Gross domestic product, and Balance of Payment.

1.1 Background of Study

On the day of June 1967, it is an historical moment for the Malaysian history because the new central bank of Malaysia, Bank Negara Malaysia had introduced the Malaysian dollar. The Malaysian dollar was use to replace the Malaya and British Borneo dollar.