The baht has risen about 9.5 per cent against the greenback this year, and has emerged as a top-performing Asian currency mainly due to the central bank's tight monetary policy.

Usara Wilaipich, senior economist at Standard Chartered Bank's local branch, said yesterday that she believed the baht would strengthen to Bt37 to Bt36.5 per dollar this year.

Yesterday the baht closed at Bt37.56, down from its Bt37.48 close on Monday. Its weakest level during the day was Bt37.61.

The weaker currency resulted from investors selling yen for dollars as they believe the US Federal Reserve will raise its policy rate again at its three remaining meetings this year, said a Bangkok Bank dealer.

The central bank's governor, MR Pridiyathorn Devakula, said exporters of food and textiles who wanted to see the baht at Bt38 Bt39 to the dollar were day-dreamers. He had earlier said there was no way the unit would weaken again towards Bt40. This reflects the Bank of Thailand's intention to allow the unit to strengthen along with other Asian currencies.

As for the baht's exchange rate, the BOT will try to keep it at Bt37.50 to the dollar or lower, with a maximum range at Bt38. Pridiyathorn recently told investors he was looking forward to a stronger baht for the rest of the year.

Phatra Securities believes inflation is behind the central bank's stance on the baht.

"We believe the main reason for this is the perception that the BOT is ahead of the inflation curve. Real short-term rates tend to rise in the face of stable nominal rates and declining inflation. Therefore,

the baht rose despite political uncertainty, the economic slowdown and the absence of the current-account surpluses prevalent in other Asian economies," Phatra said in a recent report.

Over the past five years, the baht has appreciated against the dollar by about 20 per cent, with the BOT trying to reduce currency instability and assist the economic adjustment process.

However the central bank's interventions always came with costs.

"The costs associated with intervention to keep the baht weak are numerous. Intervention in the spot market that necessitates sterilisation leads to baht interest expenses and increases in holdings of a depreciating dollar. Holding more and more dollar-forward positions entails rising contingent losses if the dollar continues to depreciate. Therefore, intervention is likely to be carefully calculated," Phatra said.

This has already been shown in the central bank's financial statement, which recorded a net loss for the first time in four years. At the end of last year, the BOT recorded a net loss of Bt1.7 billion mainly due to expenses as large as Bt39.3 billion, an increase of 88.6 per cent year on year.

Of these expenses, Bt26.7 billion were interest costs. The BOT's total income in 2005 came in at Bt37.5 billion, up only by 11.5 per cent on the year.

The central bank issued bonds totalling Bt593.5 billion during the year to absorb liquidity or to neutralise markets, with interest expenses of Bt11.7 billion resulting from the issuance. It also made foreign-exchange losses of Bt7.9 billion, compared with no loss at all the previous year.

The volatility of the baht's movement was also quite high last year, as net trading of foreign currencies between banks and their customers was accounted at US$3.1 billion (Bt116.5 billion), up 90.3 per cent from 2004. This trend will last and might increase during the rest of the year.

Bandid Nijathaworn, deputy governor of the BOT, said recently that capital flow into the Kingdom would cause volatility as foreign investors shift their funds to Asia in a bid to avoid being affected by the US current-account deficit adjustment.

Moreover, deep-pocketed investors from the Middle East who benefit from rising energy prices are expected to invest in Asian assets. These factors are significant enough to create instability in the local currency market until next year, not to mention the impact from changes in the value of the Chinese yuan.

It seems the central bank might have to dip into its coffers again.

Finance Reporters

The Nation