The move marks a shift in strategy by Ms Yingluck, who put up mild resistance as demonstrators calling for an unelected council to take power occupied buildings and streets over the past three months. Bombings at anti-government rallies and shootings in the capital have killed one person and injured 70 since Jan 17. Global funds bought $139 million more Thai bonds than they sold in the first two days of this week amid speculation the central bank will lower borrowing costs on Wednesday.
"The situation is getting worse, and the state of emergency is another negative factor" for Thailand, said Disawat Tiaowvanich, a foreign-exchange trader at Bangkok Bank Pcl. "We can't see how it will end. The baht will remain under downward pressure."
The baht depreciated 0.2%, the most since Jan 15, to 32.89 per dollar as of 8.32am in Bangkok, according to data compiled by Bloomberg. It has weakened 5.2% since the protests began on Oct 31. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell seven basis points, or 0.07 percentage point, to 7.15%.
Suthep Thaugsuban, a former opposition party lawmaker leading the protests, vowed to continue blockades of major Bangkok intersections that began on Jan 13. Thailand last experienced a state of emergency to combat protests in 2010, when Mr Suthep's Democrat Party held power and oversaw a crackdown on protesters loyal to former premier Thaksin Shinawatra, Ms Yingluck's elder brother, that cost the lives of more than 90 people.
Two-year government bonds, which are the most sensitive to the policy outlook, were steady. The yield on the 3.125% debt due December 2015 was unchanged at 2.41%, according to data compiled by Bloomberg.
The Bank of Thailand will likely cut its policy rate to 2% from 2.25% on Wednesday, according to 14 of 21 economists surveyed by Bloomberg. Seven forecast no change. The central bank delivered a surprise 25-basis-point reduction at its previous meeting on Nov 27. The decision is due 2.30pm local time Wednesday.