The USD Index is a precious tool.
It measures the performance of the US Dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF and SEK.
I’ve created a chart to represent and compare the evolutions of the USD Index and the exchange rate USD-THB, using index with the base 100 set in august 2004.
In august 2004, the USD Index was at 88,29 points and the USD-THB exchange rate was 1 USD = 41,59 THB.
(the 2 black lines are the beginning and the end of capital controls, december 2006 and march 2008).
Now, I’m certainly not a mathematician… But I see a clear correlation.
When the USD Index is getting weaker, the exchange rate USD-THB decreases (1 USD gives less THB)… And when it goes up (since july 2008), the exchange rate is following like a good dog (the THB is going down, so you get more THB against 1 USD) !
Tell me if my logic or my methodology are flawed.
I see one minor defect to the methodology : the value of the USD Index is a monthly average, but the value of the monthly exchange rate USD-THB is “end of period”.
But still, the trend is visible : there is a link, a correlation.
How to explain such a link ? A mechanical link would exist for instance if the THB was part of the basket of currencies used for the calculation of the USD Index. But that’s not the case.
So ? There are only 2 explanations : chance or “the invisible hand”. 😉
It has been documented over and over during the capital controls period : the BOT was buying USD like crazy to curb the appreciation of the THB (to protect thai exports).
Usually, skeptical people give 2 counter arguments :
-1-there is no “peg” anymore. It was ended in 1997. Yes it’s true. But what’s the difference between a “peg” and a “trading range” ? It’s a mere wording issue. The logic remains : exchange rate manipulation or “management” if you prefer.
-2-there is no way a central bank can control the forex market, because this market is so liquid and so huge.
Hey guys, how on earth could you put on the same level let’s say the Euro for instance and… the THB ? 😉 It’s meaningless.
My point : who is buying THB outside Thailand ? The THB is a non market.
Moreover, thanks to capital controls, Thailand has avoided the hot money (it was more difficult to inject short term money into Thailand) during the hot money peak (2007).
The smaller a market is, the easier it is to “manage” this market.
So again, don’t be fooled by words or denials. The BOT is watching the USD movements like a mother watches her child, because the USD-THB is the key (look at the chart about exports receipts…) as far as exports are concerned.
(Methodology used for this chart :
-USD Index, monthly values (here)
-Official USD-THB exchange rate (used for foreign reserves), per month at end of period, from the Bank of Thailand
-August 2004 is set as base 100
-then for each month, we calculate the evolution in % compared to the previous month, and we apply this percentage to the value of the index)