The baht is expected to retreat beyond 36 to the US dollar by year-end following the unexpected devaluation of the yuan, say analysts.
CIMB Thai Bank's research centre warns the baht could slide to 40 to the dollar next year in the event of a currency war.
Head of research Amornthep Chawla said a currency war should not be ruled out, as the People's Bank of China is likely to further weaken the yuan for both the short and long term to combat a deepening slowdown in the world's second-largest economy.
If that happens, it would pose a threat to South Korea's won, the Singapore dollar, Taiwan dollar and the baht, as they have high exposure to China, he said.
The research house has revised down its baht forecast from 36 to 37 versus the greenback by year-end. It also predicts the yuan will depreciate to 6.50 against the dollar.
"If a currency war is triggered by the yuan's devaluation, the baht will reach 40 to the dollar, but it would be only short-lived depending on China’s foreign exchange policy," Mr Amornthep said.
The baht yesterday stood at 35.51/35.53 compared with 35.75/35.77 on Monday.
Despite the baht's pullback against the dollar, it will not help much in improving exports because the currencies of its rivals have also weakened, with some even falling at a faster pace.
The baht has plunged by 7-8% against the dollar this year compared with 18% for Malaysia's ringgit.
Kasikorn Securities executive chairman Thiti Tantikulanan said the baht was expected to weaken to 36.25 against the greenback by year-end due mainly to the trend of weakening Asian currencies including the yuan.
The company has revised down Thailand’s 2015 GDP growth rate from 3.3% to 2.5% due to higher internal and external risks.
These include the US Federal Reserve’s expected interest rate hike next month and subdued domestic economic conditions, Mr Thiti said.
"The baht is expected to continue experiencing volatility in the coming periods, but its value is not projected to reach 37 [against the dollar]," he said.
"[Weakening] regional currencies are considered as having greater weight on the baht’s value than domestic economic conditions."
Mr Thiti said the baht’s value had continued to slide due mainly to a domestic equities sell-off and the depreciation of regional currencies on the back of measures inducing competitive devaluation initiated by central banks.
The Bank of Thailand’s Monetary Policy Committee is expected to keep its 1.5% policy interest rate unchanged at its next meeting on Sept 16 due to volatility in global financial markets and the baht's rapid weakening, he said.
Mr Amornthep said Thailand must reform its economy and strengthen long-term competitiveness because of the middle-income trap, liquidity trap, delays in private investment and an ageing society.