Additional question: Based on three approaches (balance of payment, three parity

theories, fundamental analysis) to explain the behavior of exchange rates for these
following currencies. (USD/THB)

Spot rate between US dollar and Thai baht:

12/2022: 1THB =  $0.0287 or 1 USD = 34.7557 THB

1/2023: 1 THB =  $0.0304 or 1 USD = 32.867 THB

Balance of payment
BALANCE OF TRADE
COUNTRY 12/2022 1/2023
USA -67.419 USD MILLION -68.289 USD MILLION
THAILAND -1.030 USD MILLION - 4.649,6 USD MILLION

If a country imports more than it exports, there is relatively less demand for its currency,
so prices should decline. In the case of currency, it depreciates or loses value. In this case,
the US trade balance is more in deficit than Thailand, so the dollar depreciates.

CURRENT ACCOUNT
COUNTRY 12/2022
USA -217.106 USD MILLION
THAILAND 1.102,01 USD MILLION

The current account is the pat of the balance of trade that reflects the exchange of goods
and services with other countries. The deficit in this account shows that the country is
expending more on foreign expenses than earning. On the other hand, which means the
country needs more foreign currency than its earnings. This excess demand for foreign
currency reduces the home currency's exchange rate in exchange of foreign currency. The
increase in the balance of trade deficit is one of the many reasons for the dollar to
depreciate against the baht.
 FOREIGN DIRECT INVESTMENT
COUNTRY 12/2022
USA 69.144 USD MILLION
THAILAND 69.456,9 THB MILLION

FOREIGN EXCHANGE RESERVES

COUNTRY 12/2022
USA 37.209 USD MILLION
THAILAND 216.632,54 USD MILLION
Surplus in the financial and capital accounts are not enough to cover the large deficit in
the US trade balance. Leading to the result is that the dollar depreciates despite a surplus
in the financial account.

Fundamental analysis
INTEREST RATE
COUNTRY 12/2022 1/2023
USA 4,5% 4,5%
THAILAND 1,25% 1,5%

INFLATION RATE
COUNTRY 12/2022 1/2023
USA 6,5% 6,4%
THAILAND 5,89% 5,02%

Factors that influence exchange rates:

 Inflation rate: Changes in relative inflation rates can affect international trade
activity, which influences the demand for and supply of currencies and therefore
affects exchange rates.
 At the end of 2022, 1 Thai baht = $0.0287 and increases to $0.0304 by the
beginning of the 2023. It can be concluded that because the inflation rate of
Thailand decreases more than that of the US, the US price is higher than that of
Thailand, so Americans buy more Thai goods and Thai importers reduce their
imports of US goods, leading to demand of baht increases, the supply of baht
decreases. All these effects make the baht appreciate.
 Interest rate: Increase in Thailand rates leads to increase in demand for Thailand
deposits and a decrease in demand for US deposits, leading to an increase in
demand for baths and an increased exchange rate for the baths.
 Income levels: Increase in US income leads to an increase in US demand for
Thailand’s goods, an increased demand for Thailand’s currency relative to the
dollar, and an increase in the exchange rate for the Thailand’s currency.
 Government controls: As described above, the Thailand interest rate rose, and the
US interest rate remains the same. The typical situation would be the increase in
Dollar supply. If the Thailand government imposes a high tax on interest income
earned from foreign investment, investors will be discouraged from exchanging the
dollar for bahts.
 Expectations: The last factor that influences the exchange rate is expectations of
future exchange rates. Like all financial markets, foreign exchange markets react to
the news that can create future effects. The effective can either increase or decrease
the exchange rate. In this case of Thailand, investors may expect interest rate in
Thailand to rise, and they invest in that country, leading to a rise in the demand for
baht and an increase in the exchange rate for Thai’s baht.
Political Stability: Foreign investors always seek to find politically stable countries.
The more stable the country's political condition, the more the country is attractive
in the eyes of foreign investors and vice versa. Now, a politically stable country is
more appealing to foreigners and the demand of the currency of that country is more
to the foreigners. As a result, the exchange rate of the country will appreciate against
foreign currencies and the country's currency will be strengthened.
Interaction of Factors: Interaction among factors can create change in factors’
influence. Most of the times, the factors don’t affect the exchange rate individually.
The effect is simultaneous on the exchange rate. Because of the interaction of
factors, the exchange rate sometimes goes in the opposite direction as it should have
been. This interaction mainly determines the exchange rates. As an example
Increase in income levels can cause an increase in expectations of higher interest
rates. It also can result in increased imports and more financial inflows. Favorable
financial flows at best can strengthen the local currency, and exchange rate
decreases against foreign currency. In this way interaction of factors can make
different results.