BANGKOK: -- Buoyed by the yuan's new high yesterday, the baht surged to 34 to the US dollar in the offshore market, underlining the futility of the central bank's drastic measures to rein in baht speculation.
Onshore, the baht ran up to Bt35.75, forcing the Bank of Thailand (BOT) to enter the market with baht sales to sap the unit's upward momentum.
Traders said dollar sales and the yuan's advances were both behind the rapid appreciation of the baht.
Despite the BOT's intervention to stabilise the baht, analysts asked whether now was the time for the authority to revise its policy to stem capital inflows.
The baht opened at 35.86, then sky-rocketed for the first time since the central bank introduced its draconian capital controls on December 19.
BOT Governor Tarisa Watana-gase said the offshore baht's dazzling performance had a psychological spill-over effect on the onshore market, despite their separation.
A commercial bank dealer said the baht shot up without looking back after piercing the technical resistance level of Bt35.90. Some investors, who had bought greenbacks at Bt36 expecting the baht to weaken further, due to the domestic political situation, dumped their dollars to cut their losses.
Exporters also kept cashing in their dollars, while importers stayed on the sidelines thinking the baht would gain some more.
"The market earlier did not think the baht would break 35.90. When it went through that level, it climbed up quickly and reached its strongest point at 35.75/35.78 in the early afternoon," the dealer said.
The BOT appeared to supervise the market via primary dealers when a big lot of dollar buying went through. The baht then settled at a more sustainable level of 35.75.
A Siam Commercial Bank
dealer believes the BOT did initiate market operations, while the baht was just riding the regional market trend.
The yuan hit 7.7681 to the dollar, its highest point since its revaluation in July 2005.
The yen was also stronger at 120.21 to the dollar after a European Central Bank meeting remarked that the Japanese currency had been too feeble for too long. The yen's slump is being rumoured to be a possible topic at the Group of 7 meeting next month.
Then the market sold the dollar to seal in profits.
A BankThai dealer said the baht had added value sharply over the past few days, particularly in the offshore market. He said the market was waiting for the central bank to relax its withholding measure by exempting the foreign borrowings of local companies. Thus, there was a pick-up in demand for the baht.
Standard Chartered Bank (Thai) economist Usara Wilaipich said the side effects from the central bank's capital-reserve requirement had distorted the market more than the central bank had expected, while its objective of stabilising the baht had bumped into an "impact limit".
She pointed to the one-sided effect of the separation of non-resident accounts for stock trading from normal non-resident accounts. This has dried up offshore baht liquidity, as foreigners sought baht to pay for stock trades.
Another side effect is the higher cost of foreign borrowings by local companies.
"While there are these side effects, the objective of the central bank to stabilise the baht has reached the impact limit that can be effective at a certain level," she said.
The BOT will eventually resign itself to diluting the measure, as demanded by the current market situation, she said, adding that the central bank would then rely on monetary policy to squelch baht speculation.
An investment banker said if the central bank's target was the speculators who were intent on making money from appreciating Asian currencies, it could simply have fixed the baht rate at 36 for all incoming and outgoing baht and eliminated the currency gain from the equation.
"This would have had the effect of allowing the free flow of money without all the negative side effects of this 30-per-cent rule, including that one-day plunge in the market, which had to have crushed local investors," he said.
A recent Phatra Securities report questioned the effectiveness of the capital-control policy.
"The authorities' attempts to stabilise or weaken the baht may have only a limited impact, because the underlying cause of the baht's strength, in our view, is that Thailand is exporting too much. That is, Thailand cannot find ways to use the foreign exchange it earns," said the report.
The government should urgently focus on reviving both private and public investment. The report said doing so would promote growth in the long term and raise demand for imports to bring about a market equilibrium that calls for a weaker baht.
Chulalongkorn University economics lecturer Sompop Manarungsan said if the central bank scrapped the capital-control measure, the net effect would be positive. The benefits from the measure are outweighed by the damage to the capital market.
-- The Nation 2007-01-26
