By Gregor Stuart Hunter, Kenan Machado and Yantoultra Ngui

Malaysia's efforts to clamp down on currency speculators in recent days are rattling investors and raising the specter of capital controls last seen during the Asian financial crisis nearly two decades ago.

The Malaysian ringgit sank and government bonds sold off after the country's central bank last week said it had requested that foreign banks operating there refrain from speculating on the currency in offshore markets, which it said were unduly influencing the ringgit's value.

The ringgit is down 5.4% month-to-date, the second-biggest decliner among Asian currencies behind the Japanese yen. The yield on the country's benchmark government 10-year bond, meanwhile, has risen to 4.350%, up from 3.621% at the start of November. Bond yields rise when prices fall.

The Malaysian authorities' attempt to curb the ringgit's fall is the latest example of the pressure being placed on central banks in emerging countries following Donald Trump's surprise U.S. election victory.

Mr. Trump's win has raised expectations the U.S. will pursue inflationary policies that will force the Federal Reserve to raise interest rates more quickly than previously expected. In turn, that has led the dollar to strengthen against most global currencies, while the rising yield on U.S. Treasurys has increased their attractiveness for investors relative to bonds issued by developing nations.

"The ringgit has been one of the main casualties from the rising yields in theU.S.," said Sean Callow, a senior foreign exchange strategist at Westpac Banking Corp. in Sydney.

Besides its move to tame speculation, Bank Negara Malaysia, the Malaysian central bank, has confirmed that it intervened in currency markets in the past week to defend the ringgit.

Some market participants say its actions could be counterproductive if they persuade investors to flee Malaysian assets. Foreigners own a little more than half of Malaysia's government bond market, according to data from HSBC.

"When authorities change the goal posts at a whim, it destroys investors' confidence," said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada. "It's destroyed liquidity and everyone's rushing for the exit door."

The central bank's key move in recent days has been a request to foreign banks operating in its domestic foreign-exchange markets that they refrain from speculating in so-called nondeliverableforward markets linked to the ringgit,

Nondeliverable forwards are contracts that allow investors to speculate on the future value of a currency. They are often used by investors and banks as a means of hedging themselves against currency fluctuations.

"Because of adverse consequences on genuine investors and businesses, we should no longer tolerate the nondeliverable forward market and its damaging influence over the onshore pricing of ringgit," Bank Negara Governor Muhammad Ibrahim said late last week, according to a statement issued by Bank Negara over the weekend.

The central bank's attempt to curtail trading of ringgit NDFs is concerning, said Neeraj Seth, head of Asian credit at fund manager BlackRock.

"Obviously as a global investor, it does restrict your ability to hedge your risk and that's a critical aspect of investing in the region," he said.

Malaysia's central bank has said it doesn't plan to introducecapital controls. The country severely restricted the movement of capital during the Asian financial crisis when Malaysia, Thailand, Indonesia and South Korea saw their currencies lose more than 50% of their value against the dollar in 1997 alone.

Malaysia's controls then involved pegging the ringgit to the U.S. dollar at a fixed exchange rate. Investors were required to hold the currency for at least a year after the sale of any Malaysian assets and securities in the country.

The ringgit's sharp recent fall comes as analysts warn the country faces a challenging economic outlook. In May, the International Monetary Fund said the country's foreign-exchange reserves had fallen to 80% of the level it believes adequate.

"Bank Negara Malaysia's ability to defend the exchange rate in a crisis situation is arguably much reduced relative to the rest of Asia," Royal Bank of Canada's Ms. Trinh said.

The oil-producing nation could be among countries that take a hit if Mr. Trump implements some of the antitrade rhetoric he employed on the campaign trail. Late Monday the president-elect said he would take action on his first day in office to withdraw the U.S. from the Trans-Pacific Partnership, a 12-nation trade deal to which Malaysia has previously committed.

"Malaysia would be vulnerable to a strong U.S. dollar, weak commodities and peaking globalization as [the country] heavily relies on exports," said Ken Hu, chief investment officer for fixed income, Asia Pacific, at Invesco Ltd., which manages $820.2 billion in assets.

Political risks are also rising. On Saturday, tens of thousands of protesters gathered in Malaysia's capital Kuala Lumpur to demand the resignation of Prime Minister Najib Razak. Mr. Najib's government has clamped down on opposition lawmakers, media organizations and civil society groups after questions emerged over the management of a stateinvestment fund he founded in 2009.

Write to Gregor Stuart Hunter at gregor.hunter@wsj.com and Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

November 22, 2016 03:54 ET (08:54 GMT)

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