Thanomsri Fongarunrung, senior economist at Phatra Securities, said Merrill Lynch had forecast that the baht would rise to 34.05 per dollar by December 31, an increase of 5.8 per cent from the end of last year.

The baht, however, will lag behind other Asian currencies this year due mainly to political uncertainty here.

Thanomsri said a stronger baht was anticipated because of Thailand's current account surplus and expectations the yuan would strengthen. However, a high degree of volatility is not expected to occur in the currency's exchange rate as the central bank is expected to intervene in the market to ensure stability.

Sompop Manarangsan, a lecturer at Chulalongkorn University's Faculty of Economics, said foreign exchange management in Asia would be more difficult with a wider trading band for the yuan. Consequently, Thailand needs to prepare for increased volatility. A stronger yuan will boost Thai exports to China, Sompop said.

Kasikorn Research Centre said in a report yesterday that the trend towards a stronger baht would get a push from the widened trading limit of the yuan against the dollar, which would make it more difficult for the Bank of Thailand to remove its 30-per-cent capital reserve requirement.

On Friday, the Chinese government announced that the band in which the yuan would be allowed to fluctuate against the US dollar each day would be widened from 0.3 per cent above or below the previous day's closing value to 0.5 per cent. This took effect on Saturday.

So far there has been little impact here.

The SET index yesterday closed at 728.22, down only 0.07 per cent from the previous trading day, while the baht closed unchanged at 34.59 to 34.61 against the greenback.

Brokers earlier said the impact of the yuan announcement on the Thai stock market would be minimal as its large capitalisation stocks were energy-related and their value determined by global oil prices.

Citing China's more flexible foreign exchange regime, the weakening trend of the US dollar and the expected current account surplus here, Kasikorn Research Centre forecast the baht would rise to 34 per dollar by the year-end.

It said expectations of further flexibility in China's foreign exchange regime and stronger Asian currencies would draw more foreign capital into the region. This is also expected to boost Asian stock markets, including the Stock Exchange of Thailand.

The research centre added that this would also make it more difficult for the Thai central bank to lift its capital reserve requirement, at least in the short term. The controversial measure was introduced last December to curb speculative capital inflows.

Anoma Srisukkasem

The Nation