After the baht appreciated 8 per cent so far this year, concern about the economic consequences of such a rise is becoming more evident especially when a further rise in the baht is being anticipated.
The belief that the baht will continue to rise is not far-fetched when viewed within the broader context in which the central banks of the G3 key reserve currencies – US dollar, euro and yen – are committed to near zero interest rates and quantitative easing.
The global monetary easing we are witnessing today is unprecedented. This is because the major economies are unable or unwilling to use fiscal policy to counter the economic slowdown that is now evident. For example, the US is mired in the politics of the November mid-term election, which will likely allow the Bush tax cuts to expire, implying a tightening of fiscal policy next year. Few other fiscal stimulus programmes are likely to come about even though US GDP will grow only about 1.5-1.6 per cent during the second half of this year.
In Europe the fear of falling victim to a “Greek tragedy” had most countries committing to fiscal tightening starting in 2011. This is even as eurozone GDP growth is expected to be an anaemic 1 per cent during the second half of this year, with most of the periphery countries mired in recession. During the same period, Japan’s GDP growth is expected to be less than 1 per cent.
The inability to use fiscal policy means that the job of engineering the economic recoveries of the G3 must rest solely on the shoulders of monetary policy. Near zero interest rates were put in place nearly two years ago in December 2008. But this is clearly not sufficient in the context of the devastating losses suffered by the banking system, over-leveraged consumers and near 10-per-cent unemployment.
Enter quantitative easing (QE), in which the G3 central banks not only depress short-term interest rates but also print money to buy bonds so that longer-term interest rates are kept exceptionally low as well.
On September 21, the US Federal Reserve said in effect that the US economy is slowing down and that inflation is too low. Economists see this as a signal that the Fed is moving ever closer to QE2, when it would intensify its purchases of US treasuries in order to bring long-term interest rates down even further to offset the possibility of a double-dip recession.
Meanwhile, the European Central Bank continues its policy to give unlimited credit to commercial banks. Closer to us, the Bank of Japan is believed to be conducting unsterilised intervention to weaken the yen, which means trillions more yen are being put into circulation.
|Currency Exchange Rate||Date : 28 September 2010|
|Update : 1 Effective From : 8:30||[Unit : Baht per 1 unit of foreign currency]|