If accurate, the report would directly connect the prime minister to the deeply indebted fund for the first time; 1MDB owes around $11 billion, the report noted. Najib has previously denied involvement and a government spokesperson said the prime minister hasn't taken any funds for personal use, calling the document "baseless smears" from political opponents, the report said. Local media reported over the weekend that Najib was consulting with attorneys over whether to sue the WSJ over the report.
"The 1MDB scandal -- and it is still an unfolding scandal -- shows the government has not come clean completely. They're not transparent. There's no clarity," Wong Chen, a member of Malaysia's parliament from an opposition party, told CNBC, noting that even the amount of money that the fund had lost hadn't been stated and could be as high as 25 billion ringgit (around $6.6 billion).
"The least you can do is get the numbers reported, say we've lost this money, come to parliament ask for a bit more money to save 1MDB . But whoever took this money should be accountable and prosecution should start. That is how you should restore the confidence of investors," Wong said. "Otherwise domestic investors are just leaving and that capital flight from domestic investments is essentially dragging down, the core factor of the falling ringgit."
Bargmann agreed that resolving the political concerns were key to restoring confidence in the ringgit.
"A stable government is what investors want to flow back in," Bargmann said, adding that he expected the currency could fall another 2-3 percent over the next month.
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It isn't clear whether the political uncertainty will end any time soon.
"You don't create a conducive environment when you have all these allegations going on. And you don't have a conducive environment when former prime ministers are having a go almost every other day at the incumbent prime minister, indicating factional divisions," said Lim Say Boon, chief investment officer at DBS Wealth Management.
In recent months, Mahathir Mohamad, who served as Malaysia's prime minister from 1981-2003, has called repeatedly for Najib to step down;both men are in the same political party.
Another risk for the ringgit: Foreign ownership of Malaysian government debt and its stocks is relatively high, raising the risks of outflows from the country.
Foreign ownership of the stock market is around 23 percent, above the Global Financial Crisis low of 20.4 percent, suggesting a risk of further outflows, Affin Hwang Capital said in a note last week. It cut its KLCI target to 1740 for the year end, down from 1820. In intraday trade Monday, the KLCI was down 1.3 percent at 1,711, touching its lowest levels since the "taper tantrum" in 2013, when global markets convulsed after the U.S. Federal Reserve first broached the idea it would taper its asset purchases and spurred fund outflows across emerging markets.
While markets around the Asian region have taken a hit from the news that the Greek referendum on a European bailout deal was soundly rejected Sunday, Malaysia's currency is seen as particularly vulnerable to the Greek drama.
Malaysia has both sizable growth exposure to a European slowdown via its exports and relatively little ability to further ease monetary policy to support economic growth, Santitarn Sathirathai, an analyst at Credit Suisse, said in a note last week.