Reorient Group, an investment firm based in Hong Kong, said late last month that the US dollar would be even stronger in the new year, since the dollar and Japanese currency pair had bounced up due to stronger US jobs numbers.

The company believed there was a possibility that the DXY could go above the 2005 high of 92.63 in the current quarter.

US payroll employment rose much faster than expected in November to 314,000, versus a market consensus of 230,000, but its year-on-year growth remained flat at 2 per cent while the ADP payroll data for private employment showed 2.1-per-cent year on year growth, the company said.

The DXY goes up when the US dollar gains value when compared to other currencies. It hit 89.59 on December 19 – the highest level since March 2006 – due to gains against the euro and the yen, while the baht had reached 32.98 per dollar on December 16, the day after the Stock Exchange of Thailand index fell by more than 30 points, before appreciating to 32.86 per dollar on December 19.

Supavud Saicheua, director of Phatra Capital, said on December 12 that the baht could reach 34 per dollar by 2015 due to the strengthening of the greenback.

Bank of Thailand Governor Prasarn Trairatvorakul said on December 16 that the depreciation of the baht from December 10-16 had been due to the falling price of oil, as the slowdown of market activities at the end of the year meant that any rapid movement from important commodities could have more effect on prices in the stock and money markets.

Meanwhile, the Siam Commercial Bank’s Economic Intelligence Centre forecast that the baht would weaken to 33.5 per dollar this year, and that the depreciation was likely to start in the second quarter due to capital outflows from emerging markets in anticipation of a rate hike by the US Federal Reserve in the second half of the year and an accommodative monetary policy by the Bank of Thailand to support growth.

The central bank’s Monetary Policy Committee (MPC) said after its last meeting on December 17 that “going forward, members agreed that monetary policy should remain accommodative in order to reinforce the momentum of economic recovery”.

Tisco Financial Group economist Apichat Wisitkitchakarn and Somchai Amornthum, executive vice president for research at Krung Thai Asset Management, agreed that the committee would probably maintain the policy rate at 2 per cent in the first half of 2015, but disagreed on the timing of a rate hike during the year.

Apichat believed that the MPC would hold the benchmark interest rate at 2 per cent for the whole of 2015, but Somchai and Tim Leelahaphan, an economist at Maybank Kim Eng Securities, said the committee would hike the rate by 0.25-0.50 basis points in the latter half.

Lower global liquidity

Therdsak Thaveeteeratham, executive vice president of the Research Department at Asia Plus Securities, said domestic demand for money would increase in 2015 due to the expected increase in Thai government investments, but world liquidity would be lower than last year as the US had terminated its quantitative-easing programme.

The US action meant that if the MPC had lowered the interest rate at its last meeting, the baht would be even weaker in 2015 from the outflow of capital during a US rate-hike period, which is expected to come in the second half of the year.

Tim said Maybank expected the US to hike its policy interest rate by 0.50 basis points from the current 0.25 per cent this year, while Navin Intharasombat, first senior vice president at Kasikorn Asset Management, expected the Fed to raise the rate by 0.25 basis points in the second half.

Reorient said the market might believe that the stronger-than-expected US employment report made Fed tightening more probable, but the company believed that the fragility of the US economy would limit the Fed’s ability to act.

Moreover, the fact that inflation expectations fall every time the market sees a higher probability of Fed tightening constitutes a natural brake on its impulse to raise short-term interest rates, it said.

US inflation was at a low level of 1.7 per cent in October, falling further to 1.3 per cent in November due to declining gas and heating-oil prices, said the company.

Meanwhile, another constraint on US interest rates is the continued collapse of European bond yields, due both to a decline in euro-zone growth and the expectation that the European Central Bank will purchase sovereign debt off the open market in emulation of the Fed’s quantitative easing.

Reorient said the spread between the US and German 10-year bond yields was now the widest since the introduction of the euro, and at the margin, some European – as well as Japanese – investors were starting to switch into American bonds.