Thai shares surged 1.54 per cent yesterday as fears of further interest-rate increases receded, and as the baht shot past Bt38 to the US dollar thanks to fresh capital inflows.

Like its peers in the region, the Thai bourse was euphoric, closing at 694.52 points.

Turnover was moderate at Bt13.58 billion. Foreign investors continued their buying spree, snapping up a net Bt1.32 billion worth of shares. They have accumulated more than Bt6 billion worth of Thai stocks since last week.

The baht was stronger in the morning trading session, peaking at 37.83 to the dollar - a one-month high.

It then weakened to close at 37.90-37.95. It also appreciated 0.41 per cent and 0.26 per cent against the yen and the euro respectively.

A trader at a local bank said the Bank of Thailand might have stepped in to push down the baht in late trading.

An analyst at Ayudhya Securities said that foreign funds had returned to the Thai stock market following anxiety over a possible US interest-rate hike.

The index might test the 700-point level, given the buying spree in energy, communication and banking stocks.

BOT Governor MR Pridiyathorn Devakula said that inflation this month will ease from the first half due to a low-base effect from the government's floating of the diesel price last year.

In June, the headline inflation was 5.9 per cent, against 6.2 per cent in May.

Earlier, he said that inflation in June would be higher than in May due to low-base effect.

His comment indicates that there will be pressure for the monetary policy committee (MPC) to further raise the policy rate at its next meeting on July 19.

Though pleased with the inflation trend, Pridiyathorn showed unease at the renewed capital inflows. Such inflows strengthened the baht as the US dollar weakened against other currencies, he said.

 "I should need three days to find out where the money is going," said the governor.

Atchana Waiquamdee, the BOT's assistant governor, said the appreciating baht was due to the weak dollar and investors' forecasting no US federal funds rate hike.

Despite the recent rally, investors should be more cautious on stock investment as most foreign fund flows came from short-term players like hedge funds, warned Montri Sornpaisarn, CEO of Kim Eng Securities (Thailand).

Montri said that most foreign money entering the Thai bourse recently came from hedge funds that hold stocks only for a short period. Their investment decisions rely not only on fundamentals but also currency trends.

"The chance for trading would not be as long as we expect because a lot of hedge funds are in the market. Big customers of brokers are currently hedge funds," Montri said.

As of July 3, foreign institutions posted a net buy of Bt585.03 million, while local institutions and retail investors were net sellers.

Over the past month, they sold Thai shares with a cumulative net position of Bt50 billion.

Foreign institutions have accumulated a net Bt65.27 billion worth of Thai stocks since the beginning of the year.

Bualuang Securities deputy managing director Padermpob Songkroh forecast that the SET index would peak at 700 points and then fall to a low of 620-630 points.

The broker has lowered its earning growth forecast for listed companies this year from 5 per cent to 2.6 per cent. Dividend yield for this year's performance would be 4.5 per cent, he said.

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