The baht could appreciate further to 35.30 to the US dollar in the short term, after hitting a four-month high of 35.72 early Wednesday, but political instability and deteriorating fiscal positions as a result of the government’s populist policies could limit the Thai currency’s rebound.
The baht and other Asian currencies soared after the Bank of Japan (BoJ) lifted its rates to around 0.25% and unveiled a plan to taper its huge bond-buying programme. The yen rallied as much as 0.8% to a more than three-month high of 151.58 per dollar immediately after the BoJ announcement, though reversed those gains shortly after to 153.25.
The Thai currency was trading at 35.72 baht to the greenback around noon Wednesday, compared to Tuesday’s close of 35.99, said Kanjana Chockpisansin, head of the research, banking and financial sector at Kasikorn Research Center.
“The baht gained in line with regional peers due to signs of monetary policy tightening by the BoJ, surging gold prices and weakened sentiment of the dollar ahead of the Federal Reserve meeting this week,” she told the Bangkok Post.
“If the US central bank doesn’t send any clear sign about a [widely-expected] rate cut in September, the baht could possibly strengthen further to 35.30 to the dollar this round.”
BMI, a unit of Fitch Solutions, expects the baht to hit 35.00 against the greenback by year-end, pushed by the expected start of the easing cycle by the US central bank in September.
“With the 450-billion-baht digital cash handout just around the corner, we think that the Bank of Thailand will now want to assess its full inflationary impact before embarking on any rate cuts. As such, we think that policy easing will only commence early next year,” BMI said in a research note.
This means that interest rate differentials will shift in favour of Thailand for the time being, lending some support to the baht, it added.
“However, the baht rebound will lag behind many of its regional peers. Political instability and a deteriorating fiscal position will limit any considerable appreciatory pressures on the currency,” the London-based research firm pointed out.
Given the Pheu Thai party’s history of favouring populist policies, BMI anticipates a wider fiscal budget deficit in the coming years. A more pressing issue is government debt, which is expected to increase to an estimated 64.2% of GDP in 2026, close to the 70% limit set by lawmakers.
“Investor confidence will be shaken if the debt level continues to increase, leading to significant capital outflows,” it noted. “Beyond the short-term horizon, we believe that the baht will remain on a gradual depreciatory trend.”