The Bank of Thailand is considering severing the link between gold trading and the baht as one way to limit the currency’s gains without incurring criticism by the US of foreign-exchange manipulation.
The central bank says it is in talks with market participants about converting local gold trading to US dollars, including futures, to reduce the baht’s strength. Policy makers have long complained the appreciating currency threatens to damage the country’s exports.
The baht fell at the start of the Covid-19 outbreak but has since gathered strength amid the gold fervor. The surge in the precious metal has convinced many Thais to cut their holdings, forcing local shops to sell in the international market. The step of exchanging dollars into baht as part of the process has been one of the factors helping the Thai currency gain about 5% from its March low.
The baht has been the best-performing Asian currency over the past four years, appreciating about 10% against the dollar over the period. The currency’s real effective exchange rates was at 111.4 at the end of June versus a 10-year moving average of 103.7, indicating it is overvalued, according to a gauge from the Bank for International Settlements.
The market for wholesale gold trading in baht is about $50 billion a year, or about 5% to 7% the size of of Thailand’s foreign-exchange market, according to figures from SCB Securities Co.
UBS Group AG and ING Groep NV have both warned that Thailand is at risk of being added to the U.S. watchlist for currency manipulation for meeting the criteria set out by the Treasury Department. For its part, the Thai central bank has repeatedly said it does not influence the currency to gain an unfair competitive advantage.
“If the BoT went about with the traditional managed float, it would place it on the radar of the U.S. Treasury as a potential manipulator,” said Kobsidthi Silpachai, head of capital market research at Kasikornbank Plc in Bangkok. “But to do nothing would equate to the continuation of the loss in the baht’s competitiveness.”
Whether the gold-trading proposals are approved “depends on the willingness of the next BoT governor to experiment with non-conventional monetary measures,” Kobsidthi said. The cabinet on Wednesday picked Sethaput Suthiwart-Narueput to become the next central bank governor for a five-year term starting in October.
- Gold Traders -
The Thai Gold Traders Association is studying details of the conversion plan and will see how it can comply, said Jitti Tangsithpakdi, president of the trade group. Thailand is the world’s ninth-largest gold exporter, despite not being a major producer, according to Kasikornbank.
The rule change “should help reduce baht volatility,” said Somprawin Manprasert, chief economist at Bank of Ayudhya Pcl in Bangkok. “But the baht will continue to appreciate in the long term even if our real sector is in pain,” he said, citing the country’s ample international reserves and current-account surplus.
The baht will strengthen to 30.75 per dollar this year and reach 30 at the end of 2021, Somprawin said. The currency was little changed on Wednesday at 31.505, according to data compiled by Bloomberg.