Thai Currency Is Devalued, Plunges 14%

Thailand effectively devalued its currency today, as the government said it will let the baht float freely after months of attacks by speculators.

The decision triggered a plunge in the baht and raised questions about currency stability in other Southeast Asian countries.

The baht tumbled 14% in early trading to about 28 to the dollar, its lowest since January 1985.

The decision came after the government spent 15% of its foreign currency reserves over the last eight months trying to prop up the baht from attack.

Currency raiders have targeted the baht because of the Thai economy’s dire straits, amid a massive banking and real estate crisis.

“In order to end uncertainty over Thailand’s exchange rate policy . . . the [value of the] baht will be determined by market forces,” the Thai central bank said.

Like many Southeast Asian countries, Thailand had “managed” its currency, keeping it stable versus the U.S. dollar at about 25 baht per dollar in the 1990s.

By effectively devaluing the baht, the government is taking the bitter medicine that Mexico took in 1994: The move will slash the buying power of Thais, raise local interest rates and create more problems for Thai companies that have borrowed in dollars.

The central bank said it is prepared to make product subsidies, tax waivers and loans to firms crippled by currency losses.

The upside is that, with a devalued currency, Thai products will become cheaper overseas. Likewise, the cost of locating a business in Thailand will decline.

Indeed, following the government’s move, the battered Thai stock market opened lower--then rocketed higher.

In early-morning trading, the country’s key stock index was up 36.40 points, or 7%, to 563.68. The market had plunged by more than 50% over the last year, as the economy’s woes have worsened.

The looming question is what effect Thailand’s decision may have on its Southeast Asian neighbors: If Thailand gains a competitive advantage with a cheaper currency, it could pressure other countries to devalue as well.