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Why this top-performing currency may falter

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Thailand's baht has surprised markets by becoming one of the world's best performing currencies over the past year despite the country's political turmoil, but that could soon change, analysts said.

"The strength of the baht has been puzzling coming as it has against a backdrop of political uncertainty, cyclical underperformance, looser monetary policy, the promise of easier fiscal policy and a strong dollar," Jonathan Sequeira, an analyst at Goldman Sachs, said in a note Tuesday.

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Only the Somali shilling, Costa Rica's colon and Guatemala's quetzal have outperformed the baht against the dollar since June of last year, he said. The U.S. dollar was fetching around 32.43 baht in early Asian trade Friday, compared with around 32.90 baht around mid-2014.

Drivers

With reserves' data suggesting the baht's strength isn't due to central bank intervention, Sequeira attributes the currency's run to lower commodity prices -- especially for gold and fuel -- spurring a decline in imports and a large trade surplus.

But while the impact of lower commodity prices on the baht will likely continue to outweigh expectations for as much as $10 billion of net portfolio outflows this year, continued currency strength will likely awaken central bank concerns about export competitiveness and spur steps to rein in appreciation, Sequeira said.

Others aren't optimistic about the drivers of baht strength.

While the strong current account surplus -- or higher exports than imports -- has been a driver for the currency, that "has to do with weak domestic demand more than anything," DBS said in a note Thursday. "Overall goods export growth remains anemic. In fact, we had zero growth in exports for the past two years."

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DBS also expects core inflation will trend lower, with a "downside risk" for its gross domestic product growth forecasts -- all factors which may weigh the baht.

Export risk

There may also be risks to Thailand's exports.

The country's agreement with the European Union (EU) for low or zero import tariffs on many products has expired and negotiations for an expected free trade agreement to replace it are on hold, Nomura noted in a report Wednesday.

"We estimate that about half of total Thai exports to the EU benefit from these privileges, which could result in losses of nearly $800 million," Nomura said, noting that the EU is the country's third-largest export destination.

The EU has refused to negotiate with Thailand's military junta government, putting the country at a disadvantage to other Southeast Asian countries, such as Vietnam and Malaysia, which are nearing free-trade deals, Nomura said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1