Why the Thai baht is defying economic gravity

[BANGKOK] On its current trajectory, the Thai baht is expected to record its biggest annual gain in six years against the US dollar, creating a headache for newly appointed Prime Minister Anutin Charnvirakul’s government.

The rally has already pushed the baht to a four-year high against the US dollar in September – and at first glance, the surge is puzzling. Thailand’s economy is far from stellar, weighed down by a 19 per cent US tariff, sluggish tourism, high household debt and, ironically, the strength of its own currency.

The currency has rallied some 5 per cent against the US dollar since US President Donald Trump’s so-called Liberation Day tariff announcement, outperforming most South-east Asian peers, including the Singaporean dollar and Indonesian rupiah.

Why is the Thai baht so strong?

Thailand’s currency began to strengthen against the US dollar in mid-2024, around the same time the government launched an economic stimulus plan, tourism rebounded, and traders started selling the US dollar ahead of the US Federal Reserve’s cycle of interest rate cuts.

Recent gains, however, are more reflective of the current weakness in the US dollar, spurred by concerns over President Trump’s trade war and its pressure on the US economy, as well as fiscal largesse. That, in turn, has prompted investors to dump US assets as questions arose over the US dollar’s traditional role as a reserve currency.

Trump’s tariffs have also, more directly, aided the baht’s gains. Thailand’s current account surplus – a measure of how much its exports and foreign income exceed what it sends overseas – had already reached US$13 billion as of August, well above the Bank of Thailand’s full-year forecast of US$11 billion. Much of this was driven by stronger-than-expected exports, such as cars, shipped early in the year ahead of impending US tariffs.

The baht has also benefited in another way: while the US imposed a 19 per cent duty on imported goods from Thailand, the country has attracted manufacturers seeking to sidestep the even steeper 30 per cent levy placed on many Chinese products by building factories there.

Foreign and domestic investment proposals – including new plans in digital, electrical and rail infrastructure projects – for Thailand reached US$32.5 billion in the first half of 2025, up 139 per cent from a year earlier.

Most intriguing, perhaps, is that the value of the baht has been influenced by the price of gold, which has surged nearly 50 per cent this year as investors offloaded US assets in favour of alternatives, including the safe-haven metal.

The 30-day correlation between gold and the baht climbed to 0.88 in June, the highest in almost three years. A near 70 per cent surge in Thailand’s gold exports to 254 billion baht in the first seven months of the year also led to a surge in US dollar inflows, boosting the local currency further.

What do gold prices have to do with the baht?

Gold holds deep cultural and financial significance in Thailand, where it is widely used as a savings vehicle, a religious offering, and a store of wealth passed down through generations.

Thai households and investors play an outsized role in bullion trading, making the country one of the top 10 gold markets in the world. When gold prices rise – as they have this year – traders sell holdings and convert the proceeds into the local currency, which in turn strengthens the baht.

In 2024, demand for gold rose 13 per cent in Thailand, the only country to notch four straight years of growth during the Covid-19 pandemic, according to YLG Bullion International, citing World Gold Council data.

What’s the problem with a strong baht?

Exporters were already feeling the pinch from new US tariffs, and now the strength of the baht – which makes Thai goods more expensive abroad – is putting more pressure on the sector. In August, the country’s exports grew at the slowest pace in almost a year, according to data from the Commerce Ministry.

Tourism is also suffering, as Thailand loses its appeal as a value-for-money destination. Between Jan 1 and Sep 28, foreign tourist arrivals dropped 7.5 per cent compared with the same period in 2024.

Chinese tourists in particular are shunning Thailand in favour of cheaper alternatives such as Vietnam and Malaysia – a trend also driven by safety concerns following a high-profile kidnapping earlier this year.

For Thai households, a stronger baht can make imported goods – such as fuel and consumer electronics – cheaper, helping to ease inflation. But for an economy that relies heavily on selling goods abroad and tourism, the downsides outweigh the benefits.

Is the Thai government concerned?

After meeting with industry leaders in early September, Anutin said his administration would urgently address concerns over the baht’s rise.

In late September, Fitch Ratings cut Thailand’s credit outlook to negative, citing mounting fiscal risks from prolonged political uncertainty and weak growth prospects. That followed a similar move from Moody’s, adding to the urgency for Anutin to act on the baht and revive a sluggish economy.

What measures are being considered?

The government faces a delicate balancing act: preventing the baht’s gains from derailing an already fragile recovery while avoiding actions that could be interpreted as deliberate weakening.

For now, officials have limited direct intervention in the currency market to ease what they say is excessive volatility. The Bank of Thailand has signalled that it prefers to let the baht be driven by fundamentals – such as the current account balance, interest-rate differentials and economic growth – while retaining the option to step in if volatility becomes excessive.

They have not been entirely hands-off. Thailand’s attempts to push back against the baht’s surge have been enough to help push foreign exchange reserves to a record of US$272.3 billion as of Sep 19, equivalent to around half of gross domestic product.

But more aggressive intervention would risk drawing the ire of US Treasury officials, who could in turn designate Thailand a currency manipulator – a label that carries the threat of trade sanctions and would deal another blow to the country’s export sector.

Thailand’s central bank is also in talks with gold traders to explore ways to curb the metal’s outsized influence on the baht. One option is to promote more gold transactions settled in US dollars through online platforms, which could reduce the direct link between bullion flows and the Thai currency.

Another measure under consideration is a tax on physical gold trading. However, officials caution that such a step would take time and require detailed studies and consultations with industry stakeholders.

Even just the government’s jawboning, however, appears to be having an impact. After officials announced in mid-September the establishment of a working group to address the strong baht, the currency weakened over the subsequent two weeks by 2 per cent against the US dollar to underperform most Asian peers.

Meanwhile, the 30-day correlation between gold and the baht slipped to 0.5 in September, its lowest level since July. BLOOMBERG