Thai Baht Surges as Dollar Weakens, Threatening Export Competitiveness
Currency has appreciated 5-6% year-to-date whilst volatility jumps from 3-5% to 7-8%, creating hedging challenges for Thai businesses
- The Thai baht's appreciation is primarily driven by a weakening US dollar, which is a result of poor American employment data and speculation that the US Federal Reserve will cut interest rates.
- The strengthening currency poses a significant threat to Thailand's export competitiveness, with analysts warning that a move past the 32-baht-per-dollar level would create major obstacles for exporters.
- The baht has strengthened approximately 5-6% against the dollar year-to-date, prompting Thailand's central bank to intervene by purchasing dollars to slow the currency's rise.
- In addition to its strength, the baht is experiencing high volatility (7-8% year-to-date compared to a historical 3-5%), which complicates business planning and increases the need for hedging strategies.
The Thai baht has returned to an appreciating trend against the US dollar, driven primarily by external factors as weaker-than-expected American employment data fuels speculation of aggressive Federal Reserve interest rate cuts.
The baht has strengthened from 32.80 to 32.46 per dollar recently, according to Sanguan Jungsakul, senior director of money and capital markets at Krung Thai Bank.
The currency has appreciated approximately 5-6% year-to-date against the dollar, despite intervention efforts by the Bank of Thailand (BOT) to slow the pace of strengthening.
"The main driver of baht appreciation comes from foreign factors, particularly the disappointing US employment figures that reflect a weakening American economy," Sanguan explained. "Markets are anticipating that the Fed may cut interest rates more than twice before year-end."
The dollar's weakness has been broad-based, affecting currencies across Asia. Taiwan's dollar, South Korean won, and Japanese yen have all strengthened against the greenback over the past five to six months, indicating this is not merely a baht-specific phenomenon.
Thailand's international reserves have surged to record highs as the central bank has intervened by purchasing dollars to moderate the baht's appreciation, reflecting concerns about the currency's impact on export competitiveness.
Volatility Concerns Mount
Beyond the strengthening trend, currency analysts are increasingly worried about heightened volatility in the baht.
Kanchana Chokpaisansilp, research executive at Kasikorn Research Center, highlighted that the currency swung dramatically from 32.87 baht per dollar on Friday to 32.46 currently - a significant overnight movement that complicates business planning.
"The concerning issue is that baht volatility has increased to around 7-8% year-to-date, compared to the historically low levels of 3-5%," Kanchana noted. "This high volatility makes it essential for businesses to implement comprehensive hedging strategies."
The increased volatility partially stems from the baht's correlation with gold prices, which have experienced rapid fluctuations. This connection has amplified the currency's movements beyond what fundamental economic factors might suggest.
Kasikorn Research forecasts the baht will weaken to 33.70 per dollar by year-end, suggesting some relief for exporters may be on the horizon.
Export Competitiveness at Risk
Roong Sanguanruang, senior director of global markets planning at Bank of Ayudhya, warned that if the baht breaks through the 32-per-dollar level, it would pose significant obstacles to Thai exports.
The currency is expected to trade within a 32.25-32.85 range this week.
"We see potential for the baht to strengthen beyond 31 per dollar in the fourth quarter, as US trade protection measures will likely make the American economy more sensitive and increase the probability of Fed rate cuts," Roong said.
The analysis suggests that Thailand can no longer rely solely on exchange rate advantages to boost exports.
Government intervention may be necessary to support industries affected by currency fluctuations, with assistance potentially needed on a product-by-product basis.
Regional Currency Trends
Asian currencies broadly strengthened on Monday, with Malaysia's ringgit leading gains of nearly 1% against the dollar to 4.233 ringgit per dollar. Indonesia's rupiah and Taiwan's dollar also posted strong gains of up to 0.7%.
The dollar fell more than 1% on Friday following disappointing US employment data, which reinforced market expectations of Fed rate cuts in September.
Christopher Wong, currency strategist at OCBC Bank, noted that aggressive dollar selling has lifted Asian currencies as markets bet heavily on Fed policy easing.
The focus now shifts to monetary policy decisions across Asia, with central banks in Japan and Singapore having kept rates unchanged last week. India's central bank meets Wednesday, whilst Thailand's monetary policy committee convenes next week.
Thailand's central bank is expected to cut rates 2-3 times this year, potentially bringing the policy rate down to 1%, though analysts consider a reduction to zero percent unlikely in 2024.
The currency dynamics reflect broader global economic shifts, with the so-called "US exceptionalism" that previously supported the dollar now being questioned following weaker economic data.
