The baht could appreciate further, after hitting a 19-month high of 32.2 baht to the dollar on Monday, if the US Federal Reserve cuts interest rates deeper than 25 basis points at its meeting this week, as falling US inflation could prompt the central bank to deliver an outsized rate cut.
The Thai currency rose from Friday's close of 33.33 baht against the greenback as investors rushed to sell the dollar ahead of the central bank's Federal Open Market Committee meeting on Wednesday, according to Kasikorn Research Center (K-Research).
The yen briefly hit 139.73 per dollar, its strongest level since July last year. Treasury yields fell a second straight week with two-year notes closing at a two-year low on Friday as bets were revived on a 50-basis-point rate cut by the Fed.
Markets are currently pricing in a 59% probability of a 50-basis-point cut on Wednesday, according to the CME FedWatch tool, against 30% a week ago. This would be the Fed's first rate cut since 2020.
"The market has for some time been expecting that the US central bank would cut the rates by as much as 50 basis points, but that expectation has not really been fully priced in until now," said Kanjana Chockpisansin, head of research, banking and the financial sector at K-Research.
The baht could rise further if the Fed eventually delivers an aggressive rate cut of more than 0.25%, she said, adding that K-Research expects the baht to trade in a range of 33.0-33.8 to the dollar this week.
Besides the US, central banks in Japan and the UK also meet this week, with both expected to stand pat for now after the European Central Bank last week lowered its deposit rates for the second time this year. Analysts believe the Bank of Japan is on course to lift interest rates, but not at its meeting this week.
Meanwhile, gold prices surged to record highs on Monday, driven by a softer dollar and also expectations of a larger interest rate reduction by the Fed this week.
Spot gold was traded at an all-time high of US$2,589.23 early Monday before easing to $2,588.29. US gold futures rose by 0.2% to $2,615.80. The dollar weakened by 0.2%, making gold less expensive for other currency holders.
"The prospect of the Fed potentially wielding the axe by delivering a 50-basis-point cut this week has sent gold and the dollar in opposite directions," said Tim Waterer, chief market analyst at KCM Trade.
"Overall conditions for gold remain favourable, with further gains likely. If the dollar continues its downward trend, gold could reach $2,700 by year-end."
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