Thailand's finance minister said on Thursday that exporters could suffer if the baht was stronger than 30 per dollar, where it has traded in recent days, and the central bank said it was seeing signs of short-term speculative inflows.
The baht hit a 17-month high against the dollar, rising to 29.73 in early trade before slipping back to about 29.85/90 at 0500 GMT, in part a reaction to the comments by Finance Minister Kittirat Na Ranong.
"The baht is at a challenging point. If it breached 30 baht a dollar, exporters will probably suffer," the minister told reporters, adding the government would make sure the baht was not too volatile.
However, he said the currency would probably weaken in the medium term as the government pushed ahead with spending on infrastructure projects worth 2 trillion baht ($67 billion), which would offset the effect of trade and current account surpluses.
The baht has been Asia's strongest currency since the start of the year, rising around 3 percent against the dollar, about the same rise recorded for the whole of 2012.
Currency policy is managed by the Bank of Thailand, which has not been seen in the market as the baht has strengthened to less than 30 per dollar this year.
Central bank Governor Prasarn Trairatvorakul told reporters the baht had gained quickly over the past two days, partly because of quite large foreign inflows into bonds and stocks.
"We have noticed that these investments are mostly short term, signalling short-term speculation," he said.
According to the Thai Bond Market Association, a net 59 billion baht ($1.98 billion) of foreign funds has flowed into Thai debt this year, with the bulk of that, 55 billion baht, going into the short end of the market.
In addition, foreigners have put a net 8.3 billion baht into the bourse, Southeast Asia's best performer last year.
However, Prasarn said the baht was moving in line with regional currencies and the central bank had the means to tackle movements if need be.
"We definitely have tools and measures in hand ... If we think it will be good for the country, we are ready to use them," Prasarn said.
He declined to say if the authorities had already intervened in the currency market. "I don't want to comment on this ... Intervention has costs, as I say, so I want it (the baht) to move in line with market forces, unless that is not good for the country."
Prasarn reiterated in an interview with Reuters this week that the central bank policy was not to intervene if movements were in line with fundamentals.
In the past, the central bank has also been comfortable with movements that were in line with those of other currencies in Asia. The trend so far this year has been mixed, with the currencies of Singapore and Indonesia slightly weaker versus the dollar.
Prasarn's broadly positive comments on the economy helped underpin the rise in the baht this week.
He also said Thailand was likely to see net capital inflows, although he did not think they would be excessive.
"Although we expect capital flows from abroad to continue this year, we also expect the continuity of outflows," he added, noting that in 2012 Thai companies made $11 billion in direct investment overseas.
"Yet the scenario we are working on is still net inflows. That's why you see the appreciation of the currency. It's a regional phenomenon, in fact," he said.