The Thai baht - Asia's strongest performing currency this year - has hit a 16-year high against the U.S. dollar this month and one economist says the baht is the region's last one-way bet.
Thailand's currency has gained around 5 percent this year as global funds boost their holdings of local bonds. Foreign investors have bought a net $12 billion worth of Thai government bonds this year, according to official figures. In addition, a narrowing trade deficit this year has helped strengthen the baht.
"The baht now looks like one of Asia's last one-way currency bets. That is associated with the baht being Asia's strongest currency," said Tim Condon, Asia economist at IG Markets.
Strong exports, meanwhile, have helped narrow Thailand's trade deficit. Thailand's exports jumped about 4.6 percent in the year to March, beating economists' expectations for a rise of 2.34 percent. Imports fell a larger-than-expected 11.5 percent in March from a year earlier.
The main risk to the baht's upward trend would be any plans to restrict fund inflows into Thailand, analysts said. Thailand's leaders have voiced concerns this year about excess capital flows leading to financial imbalances or the formation of bubbles in certain asset classes. On Thursday, Thailand's finance minister denied plans to implement capital controls on flows into the bond market, but warned that both his ministry and the Bank of Thailand felt the baht was too strong, Reuters reported.
The Thai baht was trading at about 29.14 per dollar on Friday, off a 16-year high of around 28.54 hit a week ago, but still up around 5 percent for this year. It has been steadily appreciating since May last year, having gained roughly 8 percent against the dollar since then.
Thailand's central bank has left its key interest rate unchanged at 2.75 percent since late 2012. Condon said a tight monetary policy in Thailand would continue to support the baht.
"The outsized baht appreciation is on its face evidence that monetary policy is too tight," said Condon. "However, we do not expect any change and we reiterate our forecast that the Bank of Thailand is on hold indefinitely and remain bullish on baht-denominated assets, starting with property, equities and fixed income," he added.
Other analysts were more cautious over describing the baht as Asia's last remaining one-way trade.
"Indeed the baht was one of the last one-way bets. However, it appears that the Bank of Thailand is finally losing patience," said Rob Ryan, Asia forex and interest rate strategy analyst at the Royal Bank of Scotland, referring to speculation this week that Thailand's central bank may implement capital controls.
"Comments from the central bank - and reports in the local press on Thursday - suggest that they may be contemplating more significant measures beyond market intervention," he added.
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The baht lost some of its strength on Thursday as a result of this talk, pulling back 2 percent against the dollar this week.
"I am not sure it's going to be a one way bet for the baht anymore," added Mitul Kotecha, head of foreign exchange capital at Credit Agricole bank.
"While portfolio inflows into Thai bonds have been strong equity markets have actually registered net outflows a factor that could also undermine the baht if bond flows begin to slow. We see a risk of some Thai baht weakness in the short term but eventually expect mild appreciation to resume, with our forecast of USD/THB 28.4 by the end of 2013," he said.