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Baht, peso remain under selling pressure


August 21, 2008

Baht, peso remain under selling pressure
Thai King praises governor for maintaining stability

The central banks in Thailand the Philippines reportedly intervened in their currency markets Wednesday as growing demand for the US dollar saw the Thai baht and Philippine peso depreciate.

The Bank of Thailand sold dollars in the currency market to support the baht when it slipped to 34.16, its weakest level since early November, Reuters quoted currency traders as saying.

The authorities managed to put a floor under the baht at 34.15 per dollar, but the currency is expected to stay under selling pressure because of political uncertainty and slowing exports.

In the Philippines the central bank's dollar sales went almost unnoticed but failed to stop the peso from plumbing six-week lows. The Philippine central bank sold dollars in the market on Wednesday to support the weakening peso, traders said.

"I think they (central bank) are selling dollars at the 45.65 level but I'm not sure if it's a big amount," said a Manila-based trader. A second trader said the central bank was selling dollars from 45.65 to 45.67. The peso fell as far as 45.69 per dollar, its weakest level since July 14.

In Thailand on Wednesday, King Bhumibol Adulyadej praised Bank of Thailand’s Governor Tarisa Watanagase for her efforts in maintaining monetary stability despite criticism of her by some government officials.

"Not only do you have to work hard but you are also being criticised for not doing well enough," the revered monarch said in an unusually clear allusion that most Thais will interpret as a major swipe at the government.

The king told Tarisa and private bankers he appreciated the central bank’s pursuit of a conservative and cautious monetary policy, especially as it was meant to pre-empt problems of excessive national spending.

"My thanks for all your hard and tiring monetary work and my wish for your success in national monetary management," he said in a televised audience at his palace in the beach resort of Hua Hin.

"I know that you are tired and am aware that it is not easy for you," he added. "My appreciation is for your ability to keep the monetary situation in good shape, to keep the country from heading towards a disaster which we may face if we are not careful about spending."

Thailand’s Finance Minister Surapong Suebwonglee and senior ministry officials have openly criticised the central bank’s decision to raise policy rates in mid-July, saying it was not necessarily the best way to fight decade-high inflation.

The government is worried higher rates will crimp already stuttering growth and hit its sagging popularity.

Some finance ministry officials have suggested holding Tarisa personally responsible if the bank's hawkish monetary policy fails to curb inflation and disrupts economic growth.

The central bank raised its key policy rate by 25 basis points to 3.50 percent on July 16 to try to tame oil-stoked inflation, which soared to a 10-year high of 9.2 percent in July.

Since May 2000, the central bank has adopted an inflation targeting policy to keep core inflation, excluding food and energy prices, within a 0-3.5 percent range.

Economists expressed concern a few weeks ago about whether the BoT would retain policy independence after the cabinet appointed a new BoT board packed with pro-growth government nominees.

Under a new Bank of Thailand act, the board can appoint a new Monetary Policy Committee, as well as fire the governor. However, the new bank board has yet to come into being as the king has yet to sign off on the cabinet decision.

The king has not made clear his reasons for the delay in approving the board's appointment.

Meanwhile, the Kasikorn Research Center (KRC), a research arm of Thailand’s Kasikorn Bank, attributed the sharp decline in the currency to the continued heavy buying of the greenback by foreign banks in Thailand and importers as the month-end nears.

It said the baht had weakened in the same direction of other regional currencies while the dollar continued to strengthen upon concerns over the global economic weakening.

KRC projected the baht would continue to weaken in the short run with a next strong support level of 34.20-34.50 to the dollar since the green is likely to strengthen further against Asian currencies.

Traders and analysts said the authorities appeared to merely smooth the declines in their currencies, rather than attempt to halt a weakening trend that looked increasingly inevitable, adding the limited scale of the defence signalled global recession was overtaking inflation as policymakers' chief worry.

They said the authorities seemed more willing than in the past few months to live with the decline of their currencies and use it to prop up their flagging exports.

"Asian central banks are intent and content with smoothing the depreciation of their currencies," Claudio Piron, a strategist with JPMorgan Chase Bank, was quoted by Reuters as saying.

He said fears that weak currencies would add fuel to already rampant inflation, gave way to concerns about faltering economic growth in export-dependent Asia.

Until last month, rising oil prices, widening trade deficits and loose monetary policies had been pressuring several of Asia's currencies. Now the headwinds have become stronger given export growth is also slowing, the US dollar is rising and there is fear of a recession in some major economies. The dollar has just hit a 7-month high against a basket of major currencies.

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