SINGAPORE -- The Thai baht fell to its lowest level in nearly two years on Tuesday and costs rose for protection against debt default as Thailand's deepening political crisis weighed on investor sentiment.
The baht and the stock market both firmed slightly on a court verdict that will mean the prime minister will step down, with some investors taking the view that this might help resolve the crisis.
Political upheaval is not new to Thailand, which has been repeatedly hit by unrest in recent years including a military coup, but the latest turmoil comes at the time when the economy is weakening amid a global economic downturn.
On Monday, credit ratings agencies Standard & Poor's and Fitch cut their outlooks on the country's sovereign debt ratings to negative from stable.
"We expect protracted political turmoil to lead to outright rating downgrades by the middle of 2009," Tim Condon, head of Asia research at ING, said in a note.
The baht edged up to 35.62 per dollar from an earlier low at 35.83 -- its weakest since February 2007, after the ruling People Power Party was ordered to disband for vote fraud.
"Some people pushed the dollar/baht pair down because they might think that domestic unrest is going to be resolved," said a trader in Bangkok.
The Constitutional Court ordered that the ruling People Power Party and another coalition party be disbanded after they were found guilty of vote fraud.
Thailand's five-year credit default swaps (CDS), or insurance-like contracts that protect investors against default or restructuring, moved out to 350 basis points from levels of around 320 basis points on Monday.
The benchmark CDS spread has widened about 150 basis points in the past month.
Fears of violent clashes increased after a grenade killed an anti-government protester and wounding 22 others.
UBS has recently cut its three-month outlook on the baht to 37 per dollar, warning that it could underperform Asian peers.
The baht, one of Asia's currencies that had been relatively unaffected by the financial crisis, has lost 5.0 percent since mid-October.
The loss was smaller compared to those in the Indonesian rupiah and South Korea's won, which amounted to more than 20 percent in the period, but it was heavier than a 3.0-percent fall in the Taiwan dollar, and a 4.0-percent fall in the Malaysian ringgit.
The benchmark stock index shed 0.8 percent on Tuesday, following a 2.72-percent loss on Monday.
Foreign investors have dumped about $1.3 billion worth of Thai stocks for the 12 weeks ended Nov 30, according to Nomura.
Most analysts expect the Bank of Thailand to cut interest rates for the first time in 16 months when it reviews policy on Wednesday.
Last week, the state economic planning agency cut its 2008 growth forecast to 4.5 percent, which would be the lowest in seven years, from 5.2-5.7 percent.
Thailand's bond yield curve is flattening with the spread between 10-year and two-year yields narrowing to about 0.5 percentage points on Tuesday from 1.2 points in June, signaling easing inflation.
