Mahathir: Malaysia peg could fall


Mahathir, Asia's longest-serving premier, welcomes Koizumi to Malaysia

KUALA LUMPUR, Malaysia -- Malaysia might be forced to scrap its currency peg if China devalues its currency, Prime Minister Mahathir Mohamad has indicated.

If Chinese authorities let the yuan slip against the dollar, to compete with the Japanese yen, that will pose problems for other pegged currencies, the Malaysian premier said on Friday.

"If it goes down, I'm worried, because it may cause China to devalue," Mahathir told reporters. "And if China devalues then of course it will force us to rethink about our ringgit peg."

Asked what would be an appropriate trading level for the Japanese currency, Mahathir said: "They say 140, but I don't know. We'll study it when it comes to 140."

Mahathir, 76, is the longest-serving head of state in Asia.

He became prime minister in 1981 and has been one of the foremost proponents of Asian economic independence from the United States and Europe.

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He is sure to have raised his concerns with Japanese Prime Minister Junichiro Koizumi who arrived in Kuala Lumpur on Thursday on the second leg of his five-nation tour of Southeast Asia.

Critics of Koizumi, who took the helm in Japan just last April, say he has been ignoring Asia to focus instead on tighter ties with the West.

He has now moved on to Bangkok, Thailand, on Friday.

But Mahathir's remarks have already had an effect, shaking the Kuala Lumpur stock market.

The main KL index plunged to a loss of 2.24 percent after he spoke, from modest morning gains.

Malaysia pegs the ringgit currency at 3.80 to the U.S. dollar. Mahathir took that step after blaming Western speculators -- George Soros in particular -- for undermining Asia in the 1997 financial crisis.

Though China does not fix its currency exactly against the dollar, the central bank carefully monitors its exchange rate. It trades in a tight band, at 8.27 or 8.28 to the greenback.

But the yen's recent slide against the U.S. currency has put pressure on Chinese and Korean companies, raising hackles in both Beijing and Seoul.

Traders say Japanese officials have been "talking the yen down," encouraging its slide against the dollar with a series of comments suggesting they approve of a weaker currency, which boosts exports.

Hiranuma: 135 is the yen's limit

After hitting 133.37 on Wednesday, the yen was slightly stronger for the second day on Friday, at 132.23.

Currency watchers speculate that Japan will try to rein in the yen at 140. But they are also not sure they would be able to.

Trade Minister Takeo Hiranuma hinted Friday that the government would step in before then.

"Many people from different viewpoints are wondering now whether a rapid fall in the yen is appropriate," he said. The U.S. dollar "is nearing 135 yen, and I think that is the limit."

But Hiranuma stressed that was his own opinion and not the official line.

A weak yen makes Japanese goods cheaper overseas and boosts revenues of Japanese companies when sent back to Japan.

But sudden moves undermine faith in Japan's economy and make life hard for overseas companies doing business in the country.

It also causes problems for countries like South Korea and China, which are big trading partners with Japan as well as being home to many competitors of Japanese companies.

Hong Kong pegs its currency exactly to the dollar, at 7.8 to the U.S. currency. Hong Kong's Monetary Authority, its central bank equivalent, says it has U.S. dollar reserves to back its exchange rate and has no intention of scrapping its peg.