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21 Nov 2007

Financial Markets

Numerous Negative Factors Plaguing US Dollar… Challenge for Thai Policymakers (Business Brief No.2074)

KASIKORN RESEARCH CENTER (KResearch) sees that it is becoming more evident that the US Dollar will continue on a bearish trend amid numerous negative factors on top of the hefty US current account deficit. Among those problems are the US sub-prime mortgage catastrophe and the liquidity crunch in financial markets coinciding with sluggishness in the US real estate market, a fact that may eventually have spillover effects on US economic growth on a wider scale. Other downsides for the greenback include investors' risk-averse behavior, unwinding of carry trade positions, reductions in USD asset holdings in various nations' foreign reserves as well as the likelihood of the scrapping of US-Dollar pegged currency systems of countries in the Persian Gulf.

KResearch holds the view that the trend of a weaker USD due to the above negative factors will inevitably persist and pressure the value of major currencies as well as regional currencies, including the Baht to appreciate. This would have a direct impact on the Thai export sector and be a challenge in maintaining the stability of our forex market while attempting to ease impacts that may affect the competitiveness of Thailand's export sector. Moreover, a weaker USD will also have side effects on oil prices in the global market to continue rising to historically high levels due to investors transferring their funds from USD-denominated assets into investments in the commodity market, especially oil. Rising energy costs have had an indirect impact on the Thai economy via higher production and transportation costs and a higher cost of living. Therefore, finding the means to handle the depreciating USD is definitely an important challenge for the Thai authorities in maintaining overall economic stability.

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