Thai Gold Plan May Curb Baht Without Incurring U.S. Anger

The Bank of Thailand’s plan to sever the link between gold trading and the baht may be a way to limit the currency’s long-term gains without incurring the wrath of the U.S. over foreign-exchange manipulation.

The Thai central bank says it’s in talks with market participants about converting local gold trading to U.S. dollars, including futures, to reduce the baht’s strength. Policy makers have long complained the appreciating currency threatens to damage the country’s exports.

While baht gains have stalled in recent months amid the coronavirus outbreak 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 dollars into baht as part of the process has been one of the factors helping the Thai currency recover.

Thai Gold Plan May Curb Baht Without Incurring U.S. Anger

The baht’s real effective exchange rates was at 111.4 at the end of June versus a 10-year moving average of 103.7, indicating 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% against the 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 $50 billion a year, or about 5% to 7% the size of the country’s foreign-exchange market, according to SCB Securities Co.

UBS Group AG and ING Groep NV have both warned that Thailand is at risk of being added to the U.S. watchlist for currency manipulation for meeting the criteria set out by the Treasury Department. For its part, the Thai central bank has repeatedly said it doesn’t influence the currency to gain an unfair competitive advantage.

“If the BOT went about with the traditional managed float, it would place it on the radar of the U.S. Treasury as a potential manipulator,” said Kobsidthi Silpachai, head of capital market research at Kasikornbank Pcl in Bangkok. “But to do nothing would equate to the continuation of the loss in the baht’s competitiveness.”

Whether the gold-trading proposals are approved “depends on the willingness of the next BOT governor to experiment with non-conventional monetary measures,” Kobsidthi said. The Cabinet on Wednesday picked Sethaput Suthiwart-Narueput to become the next central bank governor for a five-year term starting in October.

Thai Gold Plan May Curb Baht Without Incurring U.S. Anger

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. “But 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 dollar this year and reach 30 at the end of 2021, Somprawin said. The currency gained 0.2% Wednesday to 31.452, according to data compiled by Bloomberg.

©2020 Bloomberg L.P.

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