Thai baht rally may fade on dovish central bank

The Thai baht may not sustain its recent rally as a dovish stance from the central bank could take hold, according to analysts. After strengthening by 0.9% this month, making it the second-best performer among Southeast Asian currencies, the baht is expected to weaken to around 34.4 per dollar by the end of the year, with BNP Paribas predicting a dip to 33.50 per dollar.

This forecast is driven by higher oil prices impacting Thailand's trade balance and a current account deficit of US$17.7 billion last quarter, up from a surplus in the previous period. The Bank of Thailand is seen maintaining its policy rate at 1% during its August 26 meeting to support growth, potentially putting downward pressure on the currency as US yields remain high.

Analysts warn that Thailand's trade balance may stay in deficit due to a rebound in oil, eliminating a key support for the currency. Rising energy costs and geopolitical instability are further straining the economy, affecting tourism, a major growth driver. Additionally, plans to raise US$12 billion in new borrowings for economic stimulus and energy transition programs raise concerns about the country's fiscal sustainability and public debt level, which is currently at 70% of GDP.

With the lowest benchmark interest rate in emerging Asia, Thailand's baht has more room to depreciate against the dollar in the second half of the year, especially if the Federal Reserve implements three consecutive rate hikes starting in December, potentially tempering the seasonal boost to the currency from year-end tourism.