Treasury Outlook

Since late July, the US dollar has strengthened by 8 per cent against the euro, 10 per cent against the British pound and 13 per cent against the Australian dollar.

These movements do not reflect a sudden resurgence in the US economy, which should remain weak throughout 2008 and possi¬bly 2009 as well. However, while poor data from the US no longer surprises anyone, investors have begun worrying about a spate of fig¬ures from other countries.

Weak growth looks likely in Japan and Europe, with industrial production and consumer senti¬ment already showing significant decline. Australia's growth is rap¬idly decelerating, as a cyclical down¬turn in consumption and credit growth is hit further by weak com¬modity prices.

This shift should continue - the long sevenyear trend of US dollar weakness against major currencies is over. To a large extent, this reflects changing interestrate expecta¬tions. Rates in the Eurozone, Britain and Australia have peaked. They are on the way down, as a result of the improving inflation picture and deteriorating growth. Meanwhile, interest rates in the US were cut very aggressively earlier this year. Markets perceive that US rates have bottomed and are on the way up.

While a major new shift has taken shape in international mar¬kets, localmarket concerns remain depressingly familiar. The resur¬gence in political uncertainties has been the dominating factor, partic¬ularly over the past week.

Therefore, despite reasonable economic figures (latest data on the currentaccount deficit, manufac¬turing production, the private con¬sumption index and inflation were all significantly better than expected), the road ahead is still bumpy.

Prevailing local ambiguity, low local interest rates and the regional trend for US dollar strength, all provide a negative backdrop for the baht. We continue to forecast the baht weakening to the 35 to the greenback level.