Baht set to weaken as US talks up the dollar

I mentioned the stabilising US economy and improving overall dollar sentiment as the reasons.

Since then, I have become even more bearish about the baht. I expect it to weaken in both the short and medium terms.

Last week, three top US policy-makers - US Treasury secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and President George Bush - commented on the dollar with one essential objective: to give it a boost. Paulson said he would not rule out the use of intervention to support the weak dollar. Bernanke said he did not want a weaker dollar, because of the consequently higher commodity prices, particularly that for oil. For good measure, he added that the Fed would not hesitate to hike interest rates to fight higher inflation. Finally, in an interview for a European newspaper, Bush said succinctly: "We want the dollar to strengthen".

Why the sudden and unanimous verbal intervention? The reason is the price of oil, which moves in inverse relationship with the dollar. For instance, as the dollar got substantially weaker in last year's fourth quarter, the price of oil exploded.

In the US economy, domestic consumption contributes 60 per cent of growth in the gross domestic product. US retail sales figures show the economy is currently enjoying the benefit of tax rebates; consumers are spending their tax-rebate cheques, thus helping stabilise the US economy. Policy-makers are now concerned that once the tax rebates are spent, if oil prices are still high, consumers will have less disposable income, and the US economic recovery will derail.

This situation may seem to give sufficient grounds to predict a stronger dollar and a weaker baht. But it is not a sure bet, because the foreign-exchange market is too big for any one country to dictate what happens, so the US policy-makers may fail in their attempts to "talk up" the dollar.

So why am I more bearish about the baht? There is now a more threatening factor that should cause regional currencies to weaken: inflation. Recent economic data coming out of regional economies are showing Consumer Price Index numbers higher than most expected: Indonesia, 10.3 per cent; the Philippines, 9.6 per cent; India, 6.02 per cent; South Korea, 4.8 per cent; Singapore, 7.5 per cent; and Vietnam, 25.2 per cent. The sell-off of currencies due to inflation concerns is a relatively new theme but one you can expect to hear quite often as the main influence in the direction of the baht in the short and medium terms. In fact, I would not be surprised to see inflation and commodity prices become the No-1 priority of international policy-makers ahead of any financial crisis.

While the above factors may be screaming out about a weaker baht, the manner of the currency's weakening may be quite orderly. Last week, The Bank of Thailand (BOT) confirmed it had been intervening in the market to keep the baht from weakening too rapidly. The Thai central bank is not alone. The Bank of Korea, the Monetary Authority of Singapore, the Bank of Indonesia - to name only a few - have also been in the market to keep their currencies from weakening too quickly. We expect the BOT to do more of the same, especially since it bought so much US currency at the beginning of the year. Net foreign reserves are up US$20 billion (Bt667 billion) so far this year, so the central bank's ammunition for intervention remains plentiful. Therefore, I expect the baht to weaken slowly, initially to 34.20 against the dollar, with the central bank intervening along the way.

Thiti Tantikulanan is head of capital markets at Kasikornbank.