Kasikornbank (KBank) forecasts the baht will weaken more than previously projected because of the US Federal Reserve's hawkish rate hikes.
KBank revised its baht projection to 35 against the US dollar at the end of this year from a previous forecast of 33.50 baht to the dollar. The adjustment is based on the Fed's tightening monetary policy, said Kobsidthi Silpachai, the bank's head of capital markets research.
The market predicts the Fed will increase its policy rate by 25 basis points at the upcoming meeting next week.
Using hawkish rate hikes to fight a surging inflation rate, the Fed Funds rate is expected to reach 3.55% this year, rising from 1.75% now, after the US policy benchmark rate increased by 150 basis points year-to-date.
Baht depreciation the past several months was mainly attributed to the dollar movement, especially after Russia invaded Ukraine on Feb 24 this year.
Given the Fed's tightening monetary policy and a stronger dollar, the baht could decline to 36-36.50 against the dollar in the next month, said Mr Kobsidthi.
He said the Bank of Thailand's slower policy rate increases, compared with other peer central banks, are becoming a concern for the market, which sees the moves as too accommodative.
The subdued rate hikes also weaken the baht against the dollar, said Mr Kobsidthi.
However, the weaker baht has not affected foreign capital outflow significantly. Short-term bond holding by foreign investors in the Thai market has declined less, partly because of portfolio management, he said.
If foreigners sell local bonds during the baht depreciation, they could face a foreign exchange loss, said Mr Kobsidthi.
Even though the Bank of Thailand has not increased its policy rate yet, it has used foreign exchange management through international reserves to contain the inflation rate, which is an indirect method to affect the policy rate, he said.
Mr Kobsidthi said the baht is expected to strengthen next year compared with the greenback, assuming a US economic recession, which would weaken the dollar against other currencies.
In addition, a rebound in Thai tourism would support a stronger baht, he said.
According to a survey of economists about the probability of a US economic recession within the next 12 months, the figure increased to 40% from 25% in the previous survey.
The recession probability for other economies worldwide also increased, but for the Thai economy the likelihood was stagnant at 10% for both surveys.
