The baht led a drop among Asian currencies against the dollar on Monday, influenced by a struggling Chinese economy. Analysts suggest that the baht may continue to depreciate in the coming months if the US Federal Reserve (Fed) cuts rates by less than the 1% reduction that the market anticipates this year.
On Monday, the baht fell 0.5%, trading below 34.20 baht to the dollar, down from a 13-month high of 33.85 reached last Friday. Other emerging Asian currencies also weakened against the dollar, while regional stock markets, including the Stock Exchange of Thailand (SET), edged lower, reflecting the ineffectiveness of China’s measures to support its ailing economy.
The dollar climbed to its highest level against the yen since August 21, boosted by rising long-term treasury yields that reached their peak since mid-August after a key inflation indicator remained stable. This indicated a reduced urgency for the Fed to implement a significant 0.5% rate cut during its meeting on September 18.
“The rise of the dollar and US bond yields is supported by an increased likelihood that the Fed will reduce US rates by only 0.25% in this round, diminishing the chances of a 50-basis-point (bps) cut,” said Kanjana Chockpisansin, head of research for banking and financial sectors at Kasikorn Research Center (K-Research).
Ms. Kanjana pointed out that the market has factored in a potential total rate cut of up to 1% at the Fed’s remaining three meetings in 2024. Therefore, if the actual reductions are less than expected, there could be a surge in demand for US dollars, resulting in a weaker baht for the rest of the year.
“If the Fed’s statement following this month’s meeting suggests serious concerns about inflation, it could lead to a strengthening of the dollar and further weakness for the baht,” she stated, adding that K-Research predicts the baht will finish the year at 34.5 to the dollar.
Tisco Economic Strategy Unit (Tisco ESU) shares the view on US rate cuts’ effects on the baht. They believe a Donald Trump victory in the upcoming US presidential election on November 5 could also bolster dollar strength.
“Tisco ESU sees a low likelihood of significant cuts, such as 50 bps, at any meeting, as the US economy is still strong. The Fed may only lower rates by 25 bps at each meeting, which could strengthen the US dollar and put pressure on the baht,” said Komsorn Prakobphol, head of Tisco ESU.
Trump’s policies could lead to increased import tariffs on goods from China and other nations, potentially raising prices and inflation rates. He has plans to deport illegal immigrants, which could drive up domestic wages and production costs, while also proposing tax cuts that would increase budget deficits and result in more government bond issuances.
“If the Republican candidate is re-elected, his policies are likely to strengthen the dollar and weaken the baht, targeting 34.5 to the dollar by year-end,” Mr. Komsorn added.
Investors are advised to keep a close eye on the Fed meeting on September 18 and the US presidential debate on September 10 to understand the potential direction of the baht for the remainder of the year.
