The strong US dollar is back in the spotlight, at least for the short-term.

Shortly after, problems at mortgage giants Fannie Mae and Freddie Mac surfaced and suggested that the subprime problems were much more deeply rooted than previ¬ously thought.

Other worrying signs were rising unem¬ployment and firsttime jobless claims.

So, if the US economy is still weak, why a rising dollar this time.

Since July 2007, the month the true depth of the US subprime crisis came to light, the correlation between the trade weighted US dollar and the Goldman Sachs Commodity Index were negative, to the tune of about 83 per cent. That is to say, if one tosses a coin one hundred times, 83 times out the hundred, commodities and the trade weighted dollar are likely to move in different directions.

Investors and speculators had been bet¬ting long on commodities and short on dollar trades. Since early July, we have seen these commodity trades being con¬tinuously unwound.

Figures from the New York Mercantile Exchange showed that net long oil con¬tract positions by speculators (noncom¬mercial transactions) peaked at 127,491 contracts in July. Those positions have now turned from net long positions to net short positions, albeit not a large number at 5,550 contracts.

The verbal exchange between the Finance Ministry and the Bank of Thailand has intensified.

The ministry's stance is obviously progrowth which might suggest support for a weaker baht to boost exports. However, should this mate¬rialise, the six recent government meas¬ures to help people deal with the rising cost of living would have been in vain as a weak baht would only stoke inflation.

We have estimated that since 2007, movements in commodity prices and the tradeweighted baht explains about 87 per cent of the variance in headline inflation. Betting that commodity prices are on a downtrend is just that, a big gamble, unless one is totally convinced of China and India falling into recession.

Also, authorities need to consider both shortterm and longterm ramifications regarding interest rate and foreign exchange policies.

A weak baht helps make exports more competitive in the shortterm. This is sim¬ilar to a company cutting prices to boost sales. But where the similarity differs is that a weak baht is akin to allowing its suppliers to raise prices. This is the longterm effect of a weaker baht.

As inventories run down, the cost of raw materials and other production fac¬tors, such as capital equipment and wages are higher due to the weaker baht.

In a nutshell, building a case for a weak currency policy to spur growth is more likely to see its benefits eroded by infla¬tion.

Thiti Tantikulanan, is Capital Markets Business Head at Kasikornbank.