Treasury Outlook

During the past two months the baht has lost about 3 per cent or one baht against the US dollar. This may look excessive but compared to other regional units, the baht has actually weakened quite a bit less than other Asian currencies.

In two months, the Singapore dollar has sunk by 5 per cent, the Taiwan dollar by 4.7 per cent and the Korean won by 6.7 per cent.

The main cause sapping these regional currencies is oil. Going back two months, we saw the problems with the Freddie Mac and Fannie Mae blow up. This caused oil to drop from its high of $145 per barrel as well as dragged commodity prices down.

When oil and commodity prices plunged, the US dollar started to strengthen against almost all currencies.

In that twomonth period, Thailand's international foreign reserves declined by about $7.3 billion. This translates to about $900 million per week that the Bank of Thailand has been selling the US dollar in the foreignexchange market to keep the baht from weakening too rapidly.

Another reason for the baht weakness is the continuing purchase of US dollars by importers. In the first quarter, when sentiment was very bearish against the dollar, local exporters sold the dollar heavily to hedge their future receivables while most importers, who are buyers of dollars, waited.

With the dollar unlikely to weaken to its firstquarter level, importers have been buying more dollars while exporters have been selling fewer dollars, as they had already covered a good portion of their future receivables in the first quarter.

Over the weekend, the US government has taken control of Fannie Mae and Freddie Mac. In the short term, risk appetite will return to the market, as investors' fear of a complete US housing meltdown will diminish.

This will also blunt the rise of the US dollar as regional stock and currency markets recover from their recent decline.