The stronger ringgit is expected to somewhat mitigate inflationary pressures, said the Finance Ministry in its annual economic report today.

The report said the inflationary pressures had accumulated over a series of price adjustments in petroleum products and imports.

A significant development during the year was the removal of the seven-year old ringgit peg against the US dollar and in its place, a managed float, effective July 21, 2005.

Quoting the report, Bernama said the ringgit further strengthened following the shift from a fixed exchange rate regime.

Since July 21 to end August 2005, the ringgit appreciated in the range of 0.5 percent and 11.6 percent against most major and regional currencies.

The transition to the managed float has been orderly and well-managed, said the report.

The increase in the value of the ringgit against other currency has, however, not been big as the ringgit had already appreciated significantly prior to the introduction of the managed float.

Primary objective

The report said the primary objective of the exchange rate policy is to remained focused on promoting stability to facilitate economic activity.

The de-pegging of the ringgit was conducted from a position of strength, particularly resilient economic growth, rising international reserves, sustained current account surplus and a healthy banking system.

The exchange rate of the ringgit strengthened in the first half of 2005 in tandem with the stronger US dollar.

Prior to the removal of the ringgit peg on July 21, the ringgit tracked the performance of the US dollar and appreciated against the major and regional currencies.

The ringgit rose by a significant 11.9 percent against the euro, 9.7 percent against the yen and 10.4 percent against the pound.

The firmer US dollar was supported by better growth of the US economy compared to the euro area and Japan as well as US interest rate increases and expectations of further hikes.

The euro weakened on concerns over the future of European Union (EU) integration while both the euro and pound were affected by market speculation of a reduction in the benchmark interest rates.

The ringgit also appreciated broadly between 0.2 percent and 7.7 percent against most regional currencies during the same period.

The baht and rupiah weakened against the US dollar as demand for the greenback increased to pay for higher oil prices.

In contrast, the Korean won firmed against the US dollar since the fourth quarter of 2004, gaining from strong capital inflows.