What determines the exchange rate?
Each exchange rate is similar to one kind of product whose price is determined by market forces such as willingness to buy (demand) and willingness to sell (supply). That is, when people want to buy more baht, the price of the baht rises, or the baht appreciates. When people want to buy less baht, however, the price of the baht declines, or the baht depreciates.
Each currency is traded for 24 hours globally by many entities such as importers and exporters, financial institutions, foreign investors, and mutual funds. The exchange rate of each currency on the global market is passed through the local commercial banks or local money changers to firms and people in the domestic market.
What impact does the exchange rate have on our daily lives?
The impact of the exchange rate varies depending on who we are in the economy.
When the baht appreciates, people traveling overseas can acquire more foreign currency in exchange for the same amount of baht. Meanwhile, imported commodities such as oil and smartphones become less expensive.
Exchange rates can also have an impact on business. When the baht appreciates, the companies that imports raw materials from other countries gain benefits since the raw materials become cheaper when calculating the price in baht. However, the export companies suffer since selling products to foreigners and converting into baht results in less income.
When the baht depreciates, on the other hand, the people who benefit and suffer will be the complete reverse from the above story. As a result, there will always be winners and losers when the exchange rate changes.
Businesses that do not wish to experience unfavorable consequences due to a change in the exchange rate should manage exchange rate risk with financial instruments.
The Bank of Thailand and its exchange rate policy
Although the Bank of Thailand no longer uses a fixed exchange rate regime as it once did, it is still capable of managing its currency. The Bank of Thailand currently employs a managed float exchange rate regime. Under this regime, the market mechanism determines the value of the Thai baht and the Bank of Thailand could intervene in case the currency becomes excessively volatile.
The reason is that, when the baht appreciates or depreciates rapidly and does not move in line with economic fundamentals, the private sectors maybe unable to adjust themselves quickly enough, which has an impact on their spending and investment plans.
Managed float exchange rate regime
The Bank of Thailand will maintain the exchange rate under the following conditions when implementing the managed floating exchange rate policy:
- Maintain the currency fluctuation at a manageable level for individuals and businesses. The baht does not appreciate or depreciate rapidly in a short period.
- Does not contradict to Thailand's economic fundamentals