The baht led Asian currencies that weakened against the dollar on Monday on a faltering Chinese economy, with analysts suggesting the baht could be on a depreciating trend for the remaining months of this year if the US Federal Reserve (Fed) cuts rates by less than the 1% reduction anticipated by the market this year.
The baht slipped 0.5% to below 34.20 baht to the dollar on Monday, compared to the 13-month high of 33.85 last Friday, as emerging Asian currencies also weakened against the greenback. Regional bourses, including the Stock Exchange of Thailand (SET) edged lower on Monday as China's efforts to support its ailing economy failed to take hold.
The dollar advanced to its strongest level since Aug 21 against the yen, buoyed by a rise in long-term treasury yields to the highest level since mid-August after a closely watched measure of US inflation held steady, reducing the imperative for the Fed to cut rates by as much as 0.5% on Sept 18.
"The appreciation of the dollar and US bond yield is supported by higher probability that the Fed would slash US rates by only 0.25% this round, with the likelihood of a 50-basis-point [bps] dip getting lower," said Kanjana Chockpisansin, head of research, banking and the financial sector at Kasikorn Research Center (K-Research).
According to Ms Kanjana, the market has priced in that the Fed would lower rates by as much as 1% at its three remaining meetings of 2024. Consequently, if the reduction is less than anticipated, there might be a massive purchasing of US dollars, pushing the baht to weaken against the greenback for the rest of this year.
"If the Fed's statement from this month's meeting strongly suggests that it has concerns about inflation, the baht could weaken as the dollar gains strength," she told the Bangkok Post, adding that K-Research projects the baht to finish at 34.5 to the greenback this year.
Tisco Economic Strategy Unit (Tisco ESU) shares the same view about the impact of US rate cuts on the baht, while a Donald Trump victory in the US presidential election on Nov 5 could support dollar strength.
"Tisco ESU believes that the likelihood of a substantial cut, such as 50 bps at any given meeting, is low. This is because the US economy remains robust, and the Fed might only lower rates by 25 bps per meeting. Such a move could lead to a strengthening of the US dollar, putting pressure on the baht," said Komsorn Prakobphol, head of Tisco ESU.
Mr Trump's policies include increasing import tariffs on goods from China and other countries, which could raise prices and the rate of inflation. He plans to deport illegal immigrants, potentially driving up wages and production costs domestically, and reducing corporate and personal income taxes, leading to higher budget deficits and an increased issuance of government bonds.
"Should the Republican candidate be re-elected as president, his policies are likely to strengthen the dollar and weaken the baht for the rest of 2024 to a target of 34.5 to the dollar by the year-end," Mr Komsorn said.
Investors should closely monitor the Fed's meeting on Sept 18 and the US presidential debate on Sept 10 to gauge the direction of the baht for the remainder of the year, he added.