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ASEAN ANALYSIS  1 September 2010

Asean currencies are now “hard”

By David Swartzentruber
AseanAffairs   1 September 2010

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As economic problems still plague the western world, especially in the world’s largest economy, the United States, all of the values of currencies in the rest of the world are showing dramatic appreciations.

All of the Asean countries that AseanAffairs covers are seeing the value of their currencies hit peaks. As an example, the Thai currency, the baht, hit a 26-month high of 31.21 versus the U.S. dollar this morning. That’s extremely high given the baht’s history and just 6 baht above the old peg of 25 baht to the dollar.

In the early summer of 1997, before the onset of what has come to be known as the “Asian economic crisis”, the baht was pegged at 25 baht to the dollar. When it became clear that the baht was grossly overvalued, the artificial peg was removed and in about 24 hours the baht’s value dropped to around 50 baht to the dollar.

Throughout the next two years, the baht’ s value gradually improved and most of this decade the baht has traded in the 35-40 baht per U.S. dollar range. The recent strengthening of the baht is somewhat unprecedented in my view but not unexpected if one has been following the economic travails in the western world.

The strengthening of the Asean currencies is due to capital inflows into the region as Asean economies appear to investors to be currently quite robust. The effect of a stronger currency has well documented good and bad points. A stronger baht (or any Asean currency right now) means that within the country goods can be purchased with the expenditure of less money.

The higher value of the baht also stifles inflation within a country. One can recall that during the Great Depression, those that had jobs had to take their wages home in sacks or boxes.

Exports from a country, such as Thai exports to the United States, rise in value and cost more US dollars to purchase.

This is of particular concern to a country like Thailand that is highly dependent on its exports. The higher the cost of Thailand’s exports may find foreign buyers searching for goods of lower cost. Tourists to the region will find their currencies purchase fewer baht when exchanged.

This is surely the reason that Thai Prime Minister Abhisit Vejjajiva will be attending a meeting of Council of Economic Ministers at 7a.m. tomorrow to discuss the baht situation. Bank of Thailand governor Tarisa Wattanagase says the current appreciation is in line with Thailand’s strong economic fundamentals and measures to curb the baht’s strength are not necessary.

Is that the last word? Many Thai exporters have expressed concern over the baht’s appreciation.

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