Malaysia's currency, already under pressure from a political scandal and the oil price drop, really fell out of bed Monday, with the ringgit falling nearly 1 percent.
The central bank, Bank Negara Malaysia (BNM), has been intervening in the market to support the currency, but analysts said those efforts may be stumbling.
"(The central bank) can't hold the level of the currency where it is, given that their reserves have been declining. Now maybe they're starting to throw the towel," Khoon Goh, senior foreign-exchange strategist at ANZ, told CNBC Monday, noting he hadn't expected the currency to hit the 3.85-handle until next year.
The U.S. dollar was fetching as much as 3.85 ringgit in Asian trade Monday, compared with around 3.8156 ringgit Friday, before the Malaysian currency abruptly strengthened to 3.8460 against the U.S. dollar around midday. That's still hovering around its weakest levels since 1998, during the Asian Financial Crisis, with the currency among the world's worst performing after falling around 10 percent so far this year.
"Domestic political developments are suddenly to the fore and on top of that we have (central bank) Bank Negara, which tried to hold the currency earlier in July at around the 3.80 level (against the U.S. dollar) and using up around $5 billion of their FX reserves," Goh said. "I think that reserves are probably under the psychological $100 billion mark now and I think that is starting to spook the market."
The currency has been hit by a toxic brew of expectations the U.S. Federal Reserve will hike interest rates later this year, a development likely to spur outflows from emerging markets, as well as facing declining prices its key petroleum exports and a corruption scandal involving the prime minister.
The intervention likely has provided a lot of support to the spot exchange rate , based on the spread with the non-deliverable forwards (NDF), or a forward contract in which the parties settle the difference between the spot and contract exchange rates without actually delivering the currency.
"The NDF has moved a lot more than the spot," said Nizam Idris, head of currencies at Macquarie, noting that the one-month NDF is at 3.8720 ringgit against the dollar. "It's clear the (central bank) has been proactive in the spot market."
He'll be watching for the reserves data on Aug. 7 to see just how much the central bank has used since the previous release on July 15.
Others are also worried about the use of reserves to support the currency.
"Depleting reserves in order to protect the current level of USD/MYR could prove expensive as we head into Fed lift-off later this year," analysts at Morgan Stanley said in a note last week, noting that the country has among the lowest coverage of external liabilities in Asia.
In addition, foreigners hold nearly 49 percent of Malaysian government securities, and while foreign investers were net buyers in the second quarter, reversing those portfolio flows could easily overwhelm the country's current account surplus, it said.
Morgan Stanley also noted that oil and gas exports account for nearly 16 percent of Malaysia's gross domestic product (GDP), and the sector has been hard hit by crude prices falling below $50 a barrel again. The bank has a forecast for the U.S. dollar to fetch 4.0 ringgit.
Domestic politics are likely to continue to weigh on sentiment for the currency.
Last week, embattled Prime Minister Najib Razak announced a cabinet shuffle, including sacking Deputy Prime Minister Muhyiddin Yassin after he called on Najib to explain the controversy surrounding a Wall Street Journal (WSJ) report earlier this month that nearly $700 million from quasi-sovereign wealth fund One Malaysia Development Bhd. (1MDB) was deposited into the prime minister's personal bank accounts. The accusation is particularly explosive given that 1MDB is in debt to the tune of $11 billion.
The Prime Minister has denied accepting money for personal gain and is reportedly considering a defamation lawsuit against the WSJ.
"Fundamentally, the Malaysian economy is not that bad. It's just a shame that the fundamentals are being overshadowed by domestic political developments," ANZ's Goh said.
--Nyshka Chandran contributed to this report.