The baht hit a 16-year high on continuing capital inflows as Thailand, and the bond market in particular, is expected to remain a popular destination for investor borrowing cheap yen following the Bank of Japan's aggressive monetary policy easing.
The baht rose yesterday to 28.96/99 against the greenback, while the local currency also gained to 28.93/29.46 against 100 yen. The baht is the strongest currency in Asia against the dollar this year, rising 5.4%.
"Offshore funds continue flowing to Thailand and the yen carry trade is also elevating the baht as the yen is expected to weaken further," said a foreign exchange dealer at a local bank.
Carry trade involves borrowing low-yielding currencies to invest in high-yielding currencies. The yen is always the prime currency for carry trade activities as its current interest rate is close to zero and the the Bank of Japan just announced a huge stimulus programme aimed at kickstarting the economy and dragging it out of years of deflation.
Japan's easing policies are appropriate and the impact on the yen is a logical consequence, said IMF chief economist Olivier Blanchard to Bloomberg.
At its policy meeting earlier this month, the Bank of Japan pledged to double the monetary base in two years through purchases of government bonds. Governor Haruhiko Kuroda said last week that while monetary easing tends to weaken a currency, its polices are not aimed at exchange rates.
The yen has depreciated about 20% against the dollar the past six months, extending the drop after the stimulus started this month.
The dealer said dollar demand from gold dealers following the sharp decline in global gold prices during Songkran helps to limit the baht's gain, but the amount is not so substantial that it can reverse the trend.
"Gold dealers gradually bought dollars when the gold price started sliding during the holiday, so their orders today are not significant," he said.
He predicts the baht to continue to gain against the dollar over the long run, with persistent capital inflows as the central banks of the world's major economies maintain their loose monetary policies.
In a related development, foreign investors were net buyers of 3.44 billion baht in Thai bonds yesterday. Foreigners were net buyers of 107.80 billion baht in January, 80.97 billion in February, 93.64 billion in March and 41.63 billion between April 1 and 12.