By Ewen Chew 

SINGAPORE--Thailand's baht rose to its strongest level in eight months and the nation's stocks touched the highest in a year as signs accumulate that the economy is rebounding following two months of army-enforced political stability.

The currency's gains have picked up in recent days. It has climbed 1% since Friday, and is up 2.3% since the military took power in May, pledging to restore order and reinvigorate the Thai economy after months of protests. Stocks, too, have rallied, rising for five straight weeks, although they pulled back slightly Tuesday in late trading.

The investor optimism has been sparked by increased fiscal spending, including on big-ticket infrastructure projects and millions of dollars of overdue payments for rice farmers under a rice-subsidy scheme. The National Economic and Social Development Board last Saturday upgraded its growth forecast to 2% this year, from an earlier estimate of 1.5% made three days before the military coup.

In addition, exports rose 7.2% in June from a year earlier, Army chief Prayuth Chan-ocha said last week.

Currency trader Goh Rong Ren, from Skandinaviska Enskilda Banken AB in Singapore, estimates that around $2 billion worth of baht was bought in Monday's rally, when the currency broke 32 per dollar. The baht was at 31.85 Tuesday, compared with 31.89 late Monday. A lower number means a stronger baht.

Foreign investors have been buying stocks too. They have invested a net $512 million in July after $13 million in net outflows the previous month, according to Nomura, who says the portfolio inflows are likely to continue in the near term.

Thai stocks slipped as much as 1% Tuesday before recovering slightly to trade 0.8% lower.

Desmond Chua, a regional equities analyst at CMC Markets in Singapore, noted that the Thai stock market this year has generated among the best returns in the region despite the political crisis.

Still, Nomura cautions that the baht's rally may not have much further to go because a lack of confidence in the junta's economic plans is likely to prevent economic growth from accelerating significantly further.

It says it believes the baht will weaken over the medium term and is waiting for "an opportune time" to recommend to clients to bet against the currency.

Write to Ewen Chew at ewen.chew@wsj.com