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Home›Financial›Could the baht strengthen further?

Could the baht strengthen further?

By Calvin Teal
March 11, 2021
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A man walks past the exchange office of a bank in the capital. (Photo by Patipat Janthong)

The other morning before waking up, I dreamed that I was in line at a bank waiting to change my Thai baht to US dollars for a trip abroad. When I got to the counter she told me the exchange rate of baht to dollar was 25.8 and asked how many dollars I wanted. I asked her to repeat the exchange rate again and she confirmed the rate of 25.8 baht to the dollar. I thought it had to be a dream and woke up.

Yes, it is certainly a dream and the Thai baht will never reach that level, but it looks like it could get even stronger than the current ratio of 30.59 baht per dollar. There are two reasons for this possibility and neither of them has to do with the state of the Thai economy or Thai politics.

The first reason is that the United States is expected to lower its interest rate by at least half a percentage point this year. Of course, President Trump will pressure the Federal Reserve (the Fed) to lower interest rates for the benefit of the economy and the upcoming presidential election.

But the real reason is that US interest rates are the highest among developed countries, and developed countries are lowering their interest rates even more. The 10-year US bond yield, the primary driver of all domestic interest rates, is also the highest among those of other developed countries, and this is why the Fed cannot maintain the current level of rates. of interest.

Even if the Fed cuts its key rate by half a point, US rates remain well above those of their peers. And even if 1% is taken from the current federal funds rate of 2.5%, US rates will still be the highest among developed countries. On this point, I see no reason why the Fed should not lower its interest rates.

In addition, other developed countries are also lowering their interest rates, which will further increase credit spreads. Australia is the latest example, as its central bank cut its key rates from 0.25% to 1.0% on July 1.

Technically, it’s clear that the short-term fed funds rate is higher than the long-term 10-year bond rate. This concept is called an inverted yield curve, which is a harbinger of another economic recession, and the Federal Reserve still wants to address it.

Once the Fed cuts its key rate, what will happen? Will capital or dollars flow out of the United States into a “monetary safe haven”? The big question is where the money will go. I’m not a currency wizard, so don’t hold me responsible for the answer.

The rule of thumb is that when the going gets tough, the money goes where it’s safe, hence the term “safe haven”. In this case, that safe place is in countries where international reserves to gross domestic product (GDP) are high. Switzerland tops the list because its international reserves are greater than its GDP.

It’s no wonder that the Swiss franc has appreciated over 80% against the US dollar over the past 10 years. Since the inflow of capital does not necessarily benefit the economy, Switzerland has attempted to eliminate capital inflows by lowering its interest rates to a deeply negative level. Thailand’s international reserves-to-GDP ratio is also very high, especially compared to Japan, South Korea and China. Our country is certainly at the top of the list of “safe monetary havens”.

You can find the answer on the future of the Thai baht by looking at both the 10-year bond yields of developed countries and the list of countries with high levels of international reserves to GDP. The high yield on US 10-year bonds means that capital will flow out of the US into safe havens.

And Thailand’s high ratio of international reserves to GDP means the Thai baht is definitely at the top of the safe haven list, and more capital will flow into Thailand. Also, unlike Switzerland which has a negative interest rate, our current 10-year bond yield is currently 2.1%, which is a rarity. Therefore, the Thai baht will get stronger in the not-so-distant future.

So how strong will the baht get? I could make a guess based on the relative numbers, but I prefer not to because this is not a “get rich quick” article, but rather an informative article.

People tend to associate high levels of international reserves and hard currencies with strong economies. This was true under the fixed exchange rate system, as the country needs a high level of reserves to keep its exchange rate fixed.

But under the flexible exchange rate system that Thailand adopted in July 1997, countries do not need large reserves to keep economies strong. EU countries, including the UK, are good examples. Their international reserves / GDP ratios are around 5%.

On the other hand, too high a level of international reserves can be harmful for economies. Indeed, as the central bank accumulates foreign exchange reserves, it must allow more foreign money to flow into its economy.

This excessive money creates excessive debt. Switzerland, for example, has the highest international reserves-to-GDP ratio in the world, while at the same time it has the world’s highest household debt-to-GDP ratio of 128.7%.

Think about it, Bank of Thailand, think about it.


Chartchai Parasuk

Independent economist

Chartchai Parasuk, PhD, is an independent economist.


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