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Published on November 3, 2007

The Bank of Thailand (BOT) admitted it had intervened in the currency market earlier this week, warning importers not to bet that the baht would simply continue to appreciate.

The baht yesterday reversed from the appreciating trend of the previous few days to depreciate, opening at 33.99 to the US dollar, 0.21-per-cent weaker than the day before. The sudden weakening was caused by foreign investors shifting their money out of Asia, worried that Citigroup would be downgraded after it showed a red bottom line affected by the sub-prime problem.

The Australian dollar, South Korean won, Singaporean dollar and Malaysian ringgit also corrected themselves to weaken yesterday.

BOT senior director Pongpen Ruengvirayudh said exporters, importers and debtors should not bet on a one-way direction of baht appreciation, but rather should hedge their exposure regularly, in order to prevent foreign-exchange losses.

A wave of risk aversion - a phenomenon in which foreign investors draw their money out of emerging markets for fear of holding high-risk assets - could arise unexpectedly anytime, such as after an announcement of the performance of a major multinational company. This will occur relentlessly as long as the sub-prime mortgage problem continues to have a negative effect on companies' balance sheets and has yet to be corrected, Pongpen said.

The senior director said risk aversion would cause the baht - and other regional currencies - to depreciate sometimes, like it did yesterday.

"Whoever expects a one-way direction will be disappointed. It will not be like that. When the baht can be stronger, it can also be weaker," said Pongpen. The BOT maintains a close watch on the baht's movement, in order to keep it in line with other regional currencies, she said, adding that yesterday it allowed the currency to move along with market mechanisms.

The baht broke the critical level of 34 to the greenback on Wednesday and Thursday, due to a surplus in the current account and of capital inflows. Moreover, exporters had also sold the dollar forward rapidly out of fear of the prolonged strength of the baht.

Pongpen said the BOT had stepped into the currency market earlier this week to slow down the appreciating baht.

"We slowed down the rapid strengthening of the baht because we did not want the currency to be ahead of others," she said.

The BOT recommends that exporters, importers and debtors constantly use efficient risk management. They should correct their belief that the baht will always move in a stronger direction.

Pongpen said that although exporters were increasingly hedging their exposure, importers hardly ever did so.

"We rarely see importers hedge their exposures, because they think the baht will only go in a single direction. If they realised the currency can move up and down, they'd think more carefully," she said.

Anoma Srisukkasem

 The Nation