The Bank of Thailand's move on Friday asking banks to adjust their foreign-exchange position, which caused them to buy dollars and consequently weakened the baht, very much surprised the banks as it is a highly unusual practice.

On Friday Apisak Tantivorawong, chairman of the Thai Bankers' Association, was asked to meet BOT Governor Tarisa Watanagase, who later said they had discussed the baht and nothing unusual had come up. The meeting was held after another important meeting on the same day attended by Prime Minister Surayud Chulanont, Deputy Prime Minister and Industry Minister Kosit Panpiemras and Finance Minister Chalongphob Sussangkarn, after which Surayud said he was worried about the stronger baht.

No one knows exactly what was agreed between Apisak and the governor, but Apisak later sent an urgent letter to all banks saying that they had to adjust their foreign-exchange position to the level it was at at the beginning of this year. According to a financial source, their foreign-exchange position at the beginning of the year was a "long" dollar position, or to buy dollars, as opposed to the current situation in which some banks had "short" dollar positions, or were selling dollars.

Asking banks to shift to the long-dollar position means asking them to buy dollars, which would go against the trend of massive sales of dollars by exporters. This weakened the baht in the onshore market significantly, to Bt35.05 on Friday, after the Thai unit had been appreciating continually, breaking the key psychological level of Bt35 and recording a fresh nine-and-a-half-year high of Bt34.65 per dollar earlier last week.

A source from a major bank, however, said he did not understand the reasoning behind the BOT's move on Friday.

"I just wonder whether the central bank understands the nature of our foreign-exchange transactions. Sometimes banks need to short the dollar, waiting for our customers to do the opposite. If you expect customers to do transactions on Monday, you may short on Friday in preparation for that, so that the position is ultimately squared," he said.

In addition, banks are limited by the central bank's regulations stating that they cannot leave their position open - short or long - for more than a ceiling of 20 per cent of each bank's tier-1 capital. Further, to shift from a short-dollar position to a long-dollar position, banks have to do the transactions with other players in the market, which eventually has the same outcome, he said.

The confusion among banks from the surprise instruction to change their foreign-exchange position has caused high volatility in the baht, with it moving as much as Bt0.30 per dollar in one trading day on Friday.

While bankers have little understanding of the request from the central bank on Friday, it is apparent that the central bank must have seen banks' short-dollar position as putting unnecessary pressure on the baht and creating an upward trend. The sales of dollars by exporters had already been hard to deal with.

Also no one knows exactly why the BOT wants banks to shift back to their position at the beginning of this year, but it seems to be a level the central bank finds comfortable.

The move on Friday seems to be another "battle" the BOT has fought to prevent the baht from spiralling out of control, but the question is when the "war" will end.

Once the central bank revokes the 30-per-cent reserve requirement, some new measures will be required to stabilise the baht. The fully hedged measure, which is expected to remain unchanged, will help square the foreign-capital inflows so that they do not affect the baht, but it involves a higher hedging cost of around 20 basis points per transaction. This may also discourage healthy inflows.

Some are comparing the current problem of the baht, which has become more and more complicated, to the situation 10 years ago when the central bank tried to defend the currency without a clue about where its equilibrium lay. Although it is moving in the opposite direction this time, the situation is the same in that there seems to be a lack of knowledge about where the point of equilibrium is.

It has already tested Bt34.65, while many in the market are talking about Bt33 per dollar this year. Let's hope that the new measures to be launched after the reserve requirement is revoked are effective enough to bring an end to the war.

Jiwamol Kanoksilp

The Nation