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Published on March 18, 2008

The story of the strengthening of the baht and the lifting of the 30-per-cent capital-control measure are taking a back seat to the worsening crisis of the US dollar and the US economy during the past week.

The dollar opened last week on a grim note, with US employment data reporting the economy lost 52,000 jobs last month, which was more than what the market had anticipated. This has all but confirmed the US economy is indeed in a recession.

The next disappointment was the credit and liquidity crunch, which saw banks reluctant to lend to each other, due to renewed concerns of more loss write-offs from sub-prime assets.

In the middle of last week, the US Federal Reserves introduced market-friendly initiatives to alleviate the problems by offering to swap illiquid securities with "safer" US treasuries. This allowed financial institutions previously experiencing difficulties in borrowing from the market to gain access to US treasuries, which could then be used as collateral to back up future borrowings.

Next came an announcement last Friday when the Fed did something they have never done before in their history: agreeing to provide emergency funding to Bear Stearns, the fifth-largest US securities firm that is not a bank.

The biggest hammer blow came on Sunday, when JP Morgan announced it was buying Bear Stearns for US$2 per share after shares were trading in the $90 range just last December.

The implication of this unprecedented move provides an insight into how seriously the Fed is assessing the situation. As a result, the dollar broke below the all-important psychological level of 100 against the yen - the most actively traded currency pair in the world - last Thursday and touched 96 on Monday morning. The dollar/yen exchange rate can be used as a proxy on how the financial markets view the health of the US economy. Currently, Fed Fund futures give a 50/50 chance of a 1-per-cent rate cut at the next Federal Open Market Committee meeting today. A reduction of this magnitude would be the first in two decades.

For the baht, it has been two weeks since the Bank of Thailand (BOT) lifted the 30-per-cent capital-control measure, and the baht has been surprisingly stable.

Last Friday, the BOT announced the weekly changes in their net foreign-exchange-reserve position. That made it easy to understand why the baht had been so stable. The net reserves increased $3.4 billion in the week following the lifting of the 30-per-cent measure.

That shows the BOT has been selling the baht quite aggressively to prop up the dollar.

With the value of the dollar against most currencies continuing on a downtrend, the baht is also expected to grow stronger but probably at a slower pace than other currencies, due to BOT intervention. And the fact that the baht is already the second-strongest Asian currency, appreciating 7.2 per cent against the dollar so far this year, will keep speculators from aggressively pushing the baht up further. As for the largest appreciating Asian currency this year, it is the fast and furious yen, at 15.2 per cent in just 10 weeks.

Thiti Tantikulanan is head of capital markets at Kasikornbank

Thiti Tantikulanan

The Nation