The intervention effort by the Thai government is direct intervention seeing that the government sought to strengthen their currency by swapping its baht reserves for dollar reserves. The government then purchased the baht in the foreign exchange market using the dollar reserves. This action aimed at increasing the dollar supply for sale while increasing demand for the baht. For the case of indirect intervention, central bank tries to influence the currency value by adjusting the factors that affect it. In this case, an indirect intervention by the Thai government would have been decreasing the supply of Thai money, which would increase interest rates.
The intervention effort by the Thai government is non-sterilized intervention. This intervention is where the central bank gets into the foreign exchange market without making any adjustments for changes in the money supply. In sterilized intervention, the central bank makes interventions in the foreign market while maintaining the money supply. In this case, Thai government exchanged its dollar reserves for baht reserves in the foreign exchange market. As a result, the supply of the dollar increased.
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The increase in the money supply may result in a decrease in the U.S. interest rates, and this may weaken the dollar against the baht. Therefore, the desired results of the intervention effort might be achieved more using non-sterilized intervention. If the objective of Thai’s government is to boost the value of the baht, then non-sterilized intervention would be more effective.
When using the fixed exchange rate system, then inflation might be exported from one country to the next. Case in point, if during a fixed exchange rate system there are high levels of inflation in Thailand, then Thai consumers might shift the hard-hit purchases to the U.S. Similarly import of Thai goods by the U.S. consumers may have also declined. This would result in decreased production and increased unemployment in Thai. Also, the increased demand for U.S. products could result in inflation in the U.S. Therefore, a high inflation rate in Thailand could result in high inflations in the U.S. under a fixed exchange rate system. For a company like Blade, this effect is likely to be more intense because their production costs would increase, but the export rates remain fixed.
The floating exchange rate would translate to inflation problems in Thailand. For instance, high levels of inflation would result in weakening of the baht. A weak baht results in high import prices, and consequently increase the cost of Thai supplies and materials, thus increased costs of the finished goods. Also, the increase in foreign prices from Thai’s perspective would force the Thai consumers to acquire domestic products.
Blade plays no role whatsoever in these problems seeing that both its imports and exports are in the baht denomination. Therefore, a weaker baht does not have a direct impact on the companies importing from Blade Inc. However, since Blade is subject to the risk involved when the total baht received for dollars, the company is still affected by the freely floating exchange rate system.
The terms of the agreement require Thai to reverse its swapping of baht reserves for dollar reserves for the completion of its swap arrangements. The government will later be required to exchange the dollars acquired for baht. However, the reduced value of the baht will necessitate Thai’s central bank to exchange more baht for dollars required to reimburse the other central banks. Thai government’s purchase of dollars in the foreign exchange market will result in an increased supply of the baht and demand for the dollar, thus pushing the value of the baht further down. Seeing that the actions necessary for completing the swapping agreement will weaken the baht, Blades will be negatively affected upon completion of the swap because it has its net inflows in baht.
