Growing concerns over a corruption scandal involving Prime Minister Najib Razak and speculation that Malaysia's foreign exchange reserves dropped below US$100 billion (S$138 billion) last month sent the ringgit crashing to 17-year lows against the greenback yesterday.
The ringgit fell to 3.9112 to the United States dollar - its weakest since September 1998, when it reached 3.9340. Malaysia set the peg at 3.8000 at the time, amid the Asian financial crisis.
Malaysia's foreign exchange holdings have fallen 13 per cent this year to US$100.5 billion as of July 15 - the lowest level since 2010.
This has fuelled speculation that Bank Negara Malaysia, the central bank, may have intervened to halt the currency's slide, raising questions over how heavily it can continue to support the ringgit.
A slump in oil prices, a deepening political scandal, and the prospect of higher US interest rates underpinning a strengthening dollar have contributed to the ringgit's 10.6 per cent loss this year.
But Mr Khoon Goh, a currency strategist at ANZ Bank in Singapore, said the ringgit is "suffering from a confidence deficiency" and that its weakness "does not fully reflect economic fundamentals".
"We believe concerns over Malaysia's current account deterioration are overdone, given the diversified nature of Malaysia's exports," Mr Goh added.
"Unfortunately, the fundamentals are being overshadowed by domestic political developments that have soured sentiment towards Malaysian assets. The extent of the pessimism can be seen by the large foreign portfolio outflows, which began in September last year, when oil prices began to slide, but continuing in recent months," he said.
Foreign portfolio outflows have totalled US$18 billion since September last year - larger than the outflows seen during the 2013 taper tantrum but less than the US$27 billion outflow during the global financial crisis, Mr Goh said.
Meanwhile, the Singdollar has strengthened against the ringgit, climbing to 2.8153 yesterday from 2.8010 on Wednesday.
"If the ringgit continues to weaken at this rate, 2.85 may be within sight this year," Mr Goh said.
Other commodity-related currencies, such as the Indonesian rupiah and the Thai baht, have also weakened amid a stronger dollar and slower domestic growth and exports. The rupiah, the second-worst performer in Asia after the ringgit, weakened to 13,534 against the greenback yesterday, from 13,499. This comes after news that Indonesia's second-quarter economic growth dropped to its slowest since 2009, with prices for commodity and energy exports remaining weak.
ABN Amro yesterday said: "We see further weakness in the rupiah as domestic growth has continued to disappoint, and the terms of trade have deteriorated."
The baht, which fell to a six-year low of 35.188 against the dollar on July 31, was flat at 35.167 yesterday from Wednesday. "We are more bearish on the Thai baht as the recent drought is likely to reduce economic growth," ABN Amro said.