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Published on February 2, 2008

The baht yesterday hit 32.93-32.95 to the dollar due mainly to high demand for the local unit after the US Federal Reserve's steep cut in the fed fund rate by a total of 1.25 percentage points to 3 per cent within eight days.

This has left the BOT's policy signal rate 25 basis points higher than the key US rate - and the gap is attracting capital inflows.

After it opened at 33.02 to 33.03 against the greenback yesterday morning, the baht continually strengthened until reaching a peak of 32.92 in the morning session. It closed at 32.93 to 32.95.

Foreign capital has flown into the Kingdom for portfolio investment as exporters have speedily unloaded their dollar incomes. Yesterday, the Stock Exchange of Thailand also rallied by 3.4 per cent, breaking the key resistance of 800 to close at 810.86 on high trading value of Bt42.23 billion.

Chodchai Suwanaporn, director of the financial strategy and development group of the Finance Ministry's Fiscal Policy Office, said the central bank would find it more difficult to manage the baht after the US Federal Reserve's sharp cut in interest rates.

He said the BOT would face losses in both assets and liabilities in its portfolio. The depreciation of the dollar will bring about a dampened bottom line from mark-to-market dollars, while the change in the US interest rate will lower the central bank's return on investment, as its borrowing costs remain unchanged.

The bank has to borrow baht at a high cost to buy dollars, in order to weaken the local unit via intervention. However, it will obtain reduced returns by investing the dollars in assets with lower returns due to the declines in US yield curves.

The Fed's move has resulted in a depreciation of the dollar and declines in US bond yield curves, which are now lower than those of the Thai bond market across all maturities for the first time in five years, Chodchai said.

The BOT's borrowing cost is 3.5 per cent for five-year loans but its dollar-asset return is only 2.8 per cent. It has to pay 4.1 per cent for 10-year loans but receives only 3.6 per cent in return for the dollar assets.

"Earlier, the central bank could obtain high returns in investing in dollar assets," Chodchai said. "But now it cannot find anything to compensate for the impact from the strong baht, so it will inevitably face a double loss in assets and liabilities."

As of January 25, the BOT's net international reserves including the net forward position stood at US$113.9 billion (Bt3.7 trillion), rising by $1.6 billion from the previous quarter.

Chodchai suggested that the BOT chop the policy signal rate so that it is lower than US interest rate. This would help reduce the cost of borrowing and slow down capital inflows. Core inflation - excluding the price of energy and raw food - is no longer the main problem, he said.

"The cut would contribute to a psychological effect," he said. "The Monetary Policy Committee could convene ahead of its scheduled meeting on February 27 to slash a quarter percentage point [off the key interest rate] and make another cut at the planned meeting."

Satian Tantanasarit, executive vice-president for the Treasury and Markets Group at TMB Bank, said the baht would possibly approach 32.50 per dollar if the committee did not have an meeting ahead of the scheduled one on February 27.

"The pressure on the strength of the baht would decline if the committee took action ahead of the meeting," he said.

 "The government should accelerate spending and stimulate investment in the private sector. If the current account is in deficit, the baht will become weaker," said outgoing Deputy Prime Minister and Industry Minister Kosit Panpiemras.

An analyst from Sirus Securities said yesterday's high trading value resulted from a rally by all blue-chip stocks, including those in the energy, banking, property and securities sectors. He said if the SET Index could surpass the next key resistance of 825, it would be a positive sign pointing to a strong upward trend.

Finance Reporters

 The Nation