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Published on March 25, 2008

This weakness has continued this year. By the middle of this month, the dollar had reached record lows against the euro ($1.59 per euro), gold (more than $1,000 per ounce) and oil ($110 per barrel). It also weakened significantly against the Japanese yen (which traded at under 96 yen per dollar), the British pound and other key currencies.

However, last week the gloom surrounding the dollar lifted somewhat. News and results from US financial institutions were not as bad as investors had feared. The alarm felt after the sudden collapse of Bear Stearns gradually subsided. Then last Tuesday, the US Federal Reserve cut its policy interest rate 0.75 per cent - less than the 1-per-cent cut priced in by markets.

In line with this changing sentiment, investors took profit and there was a correction in both the currency and commodity markets. The baht moved in line with these trends, touching a new 10-year high of 31.10 to the dollar before gradually weakening back to above 31.40.

The Bank of Thailand continues to signal that inflation remains the primary policy concern, rather than the increasing gap between local and US interest rates. As a result, market sentiment remains mixed about prospects for the central bank's widely anticipated policy rate meeting on April 9.

Despite the recent correction, the medium-term trend for dollar weakness should continue, which will impact Asian currencies, including the baht.

Markets widely expect more cuts in US interest rates, with 13 out of 18 analysts surveyed by Bloomberg expecting a decrease of 0.5 per cent at the Fed's next meeting on April 30 and the rest targeting a cut of 0.25 per cent.

The US still faces massive challenges for its housing sector, financial markets and domestic consumption. And that's no laughing matter.

The article is contributed by HSBC in Thailand.

The Nation