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This means that, on average, the central bank has been buying the dol¬lar - about $90 million per day. Without the intervention, the baht would be considerably stronger than the current level.

There are two forces for the cur¬rent strong baht trend - one exter¬nal and one internal.

First, the US dollar's weakness is a regional and global phenomenon. About three months ago, the dollar lost its shine as a safe haven after financial markets had stabilised around the world.

Since then the market has shift¬ed its attention to the fundamentals of the dollar. The zeropercent US interest policy has caused investors to switch out of dollars and into higher yield currencies and assets.

The dollar is also now being used as a funding currency along with the yen in carry trades.

The second factor is our currentaccount surplus. To get a feel for the size of the 2009 surplus, let's look back to 2007.

In 2007, the baht strengthened from 36.00 to 30.2 or around 16 per cent. During that period, the cur¬rentaccount surplus was $15.5 bil¬lion.

This year, just from January to May, we already have amassed a cur¬rentaccount surplus of $11 billion, although comparing 2007's surplus against 2009's surplus against the baht exchange rate is a bit like com¬paring apples to oranges, as there are other factors involved in determin¬ing the exchange rate.

Nevertheless, it does give confir¬mation that the strengthening of the baht is warranted. All things consid¬ered, the baht has been holding up relatively well, strengthening only 2 per cent so far this year in the face of external and internal pressures to appreciate. At the moment senti¬ment still favours the dollar to get guardedly weaker, as evidenced by the continued increase in interna¬tional reserves.

Last week the sale of savings bonds met with great success. The Finance Ministry had to bump up the issue from Bt50 billion to Bt80 billion to accommodate the demand.

Questions began to emerge on what impact the savings bonds would have on the liquidity in the system. Banks have already started to raise fixed deposit rates for some tenors.

While Bt80 billion is a substan¬tially amount, it is only around 6 per cent of the excess liquidity in the sys¬tem - estimated at Bt1.3 trillion.

The 10year government bond yield, a good indicator of future infla¬tion expectations and liquidity, remained largely unchanged since the start of the savings bond period.

Even if the Finance Ministry issues another tranche of savings bonds next month, as reported by the press, it looks as though there is enough liquidity, for now, to absorb it.

Nevertheless, surplus liquidity is definitely on the downtrend. The 2010 fiscal budget deficit is expect¬ed to come in at about Bt350 billion. That, coupled with a possible eco¬nomic recovery, which means more loans, will drain liquidity from the system.

While the central bank's policy rate is not expected to rise this year, medium and longterm interest rates, which are autonomous from the central bank's influence and move according to supply and demand and future inflation expec¬tations, can go up soon.

Thiti Tantikulanan is the capital markets business head of Kasikornbank