Treasury Outlook

It is a very intuitive question that I am sure will be asked even more in the near future. After all, the US economy is all but in a recession and the main US interest rate looks set to be cut by another 50 basis points this week, which would bring it down to match the historical low rate of 1 per cent seen after 9/11. And yet, the US dollar continues to strengthen.

This past month, the dollar has actually been very kind to the baht and strengthened 'only' 2 per cent against the unit. Most Asian currencies saw their currencies weaken by around 4 to 5 per cent. The South Korean won was the hardesthit Asian currency casualty, weakening 18 per cent against the US dollar.

The G10 currencies were hit even harder than Asian currencies. The euro and the British pound weakened by 13 per cent, while the Australian dollar weakened by a whopping 25 per cent against the greenback in just one month.

Looking at the above data we can safely deduce that whatever is causing this strengthening of the US dollar relates to global factors and trends. There are a few factors that contribute to the trend, such as the shortterm need for US dollars for liquidity purposes, but the key factor is the repatriation of investments and loans. In a time of lowrisk environment, capital fans out globally in search of the highest returns by hedge funds, mutual funds and private equity.

When a systematic shock to the system occurred like last month, we see a pull back of these investments and loans or a deleveraging of global investments and loans. As these investments and loans are normally funded in US dollars, the repatriation requires the buying of dollars.

As for the euro and sterling, they were hit hard last month because they rose substantially against the US dollar at the beginning of the year, when the European continent seemed to have escaped the US crisis. The higher interest rates in euros and sterling also attracted shortterm funds to take advantage of the interest differential.

Hence, when European economies and financial institutions showed that they were not immune to the US crisis, their currencies took a belated dive against the US dollar.

There is no doubt that fundamentally the US dollar should weaken, but with such complicated and intertwined global investment, what should happen and what will happen can diverge for months. Expect the deleveraging of investment and repatriation to go on in the short term, at least for the next one to two months, as we are unlikely to have seen the worse of the situation yet.Therefore in the short term, expect the US dollar to rise against the baht to 35.50. The Bank of Thailand will be vigilant and not allow the baht to weaken more than other regional currencies.

After all, the Bank of Thailand still has plenty of bullets in its war chest. For the year to date, the foreigncurrency reserves are up by US$7 billion (Bt243 billion).

Thiti Tantikulanan, is Capital Markets Business Head of KASIKORNBANK.