The Bank of Thailand’s plan to sever the link between gold trading and the baht might be a way to limit the currency’s long-term gains without incurring the wrath of the US over foreign-exchange manipulation.
The Thai central bank said that it is in talks with market participants about converting local gold trading to US dollars, including futures, to reduce the baht’s strength.
Policymakers have long complained that the appreciating currency threatens to damage the country’s exports.
While baht gains have stalled in recent months amid the COVID-19 pandemic and economic headwinds, the gold fervor has contributed to the rebound in the currency from its March low.
The surge in the metal has convinced many Thais to cut holdings of the commodity, forcing local shops to sell overseas. The step of exchanging US dollars into baht as part of the process has been one of the factors helping the Thai currency recover.
The baht’s real effective exchange rates was at 111.4 at the end of last month versus a 10-year moving average of 103.7, indicating that it is overvalued, according to a gauge from the Bank for International Settlements.
The currency has been the best performer in emerging markets over the past four years, gaining more than 10 percent against the US dollar.
Despite Thailand not being a major producer of gold, the country is the world’s ninth-largest gold exporter. The amount of wholesale gold trading in baht is about US$50 billion a year, or about 5 percent to 7 percent the size of the country’s foreign-exchange market, according to SCB Securities Co.
The Thai Gold Traders Association is studying details of the conversion plan and will see how it can comply, said Jitti Tangsithpakdi, president of the trade group.
The rule change “should help reduce baht volatility,” said Somprawin Manprasert, chief economist at Bank of Ayudhya PCL in Bangkok.
However, “the baht will continue to appreciate in the long term even if our real sector is in pain,” he said, citing the country’s ample international reserves and current-account surplus.
The baht will strengthen to 30.75 per US dollar this year and reach 30 at the end of next year, Somprawin said.
The currency yesterday gained 0.2 percent to 31.452 against the greenback, according to data compiled by Bloomberg.
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