The baht has breached 29 per US dollar for the first time since 1997, while government bonds rose as unprecedented monetary easing in Japan fuelled demand for the country's assets.
The currency jumped 1.2% from its April 5 close to 28.96 against the greenback, as of 11:48am in Bangkok, according to data compiled by Bloomberg. That is the biggest advance since Feb 29, 2008, when the central bank announced plans to scrap capital controls that restricted inflows. The yield on sovereign debt due June 2023 fell three basis points to 3.46%, the lowest level since March 28. Local financial markets were shut on Monday for a holiday.
"Japan's monetary easing is leading to speculation of more incoming funds to Asia," said Disawat Tiaowvanich, a foreign-exchange trader at Bangkok Bank Pcl (BBL). "That's supporting the baht and government bonds."
Global investors bought $292 million more Thai government notes than they sold last week, adding to net purchases of $9.6 billion in the first quarter, official data shows. That compares with $31 billion for the whole of 2012.
Gains in the baht are partly being driven by Japanese stimulus policies, while the weak yen will not affect exports because the Southeast Asian country does not compete with Japan, Bank of Thailand Deputy Governor Pongpen Ruengvirayudh said. The Japanese currency fell to a four-year low versus the dollar of 99.66 on Tuesday.
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The Bank of Japan said last week it plans to purchase 7.5 trillion yen ($78.6 billion) of bonds a month and double the monetary base, which includes cash in circulation, in two years.
The baht has strengthened 5.6% this year versus the greenback, the biggest gain among 11 Asian currencies, according to data compiled by Bloomberg. It reached 28.93 earlier on Tuesday, the strongest level since a devaluation in 1997 that sparked the Asian financial crisis.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose two basis points, or 0.02 percentage points, to 5.26 percent from April 5.
Options traders are the most bullish on the baht since July 2006. Call options granting the right to buy the currency in a month cost 0.16 percentage point more than put contracts yesterday, the biggest premium since July 2006. The gap was 0.155 percentage point on Tuesday.
The Bank of Thailand held its benchmark interest rate at 2.75% on April 3, even amid calls for a cut by Finance Minister Kittiratt Na-Ranong. He said he was not comfortable with the level of borrowing costs that are attracting capital inflows. The rate compares with a maximum of 0.25% in the US and 0.1% in Japan.
"The move was probably exaggerated as onshore markets were closed for a public holiday yesterday," said Kozo Hasegawa, a foreign-exchange trader in Bangkok at Sumitomo Mitsui Banking Corp. "In addition, a break of the recent high and the 29 level also accelerated the move. The BOJ stimulus theme is still a factor in the market."