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Peso breaches 55-level vs dollar

Ramon Royandoyan - Philstar.com
Peso breaches 55-level vs dollar
The peso, bucking a strong dollar trend, found itself wading into territory unexplored since the administration of Gloria Macapagal-Arroyo. The peso last hit P55 against the greenback was on October 27, 2005.
STAR / File

MANILA, Philippines (Updated, 5:10 p.m.) — The Philippine peso breached the P55-level against the US dollar on Monday but managed to temper those losses at the start another choppy trading this week.

The local currency finished at P54.78 versus the greenback, stronger than its previous close of P54.985.

But during Monday's trading, the peso's weakest showing stood at P55.15-per-dollar. The last time the peso sank below the P55-level was way back Oct. 27, 2005, when the local currency closed at P55.08.

After the government started easing pandemic curbs, the peso has started to feel the pressure from rising imports, which were meant to meet improving domestic demand as the economy reopens. Expensive global oil prices have also bloated the Philippines' import bill, stoking more dollar outflows.

But what’s sinking the currency to near 17-year lows in the past weeks was a stronger dollar as a result of a more aggressive tightening by the US Federal Reserve, which is a stark contrast to the “dovish” strategy taken by several central banks in the region, including the Bangko Sentral ng Pilipinas,

Last week, the BSP fired off its second 25-basis point rate hike this year, ignoring calls for a much bigger adjustment to fight inflation and prevent a deeper currency slump. Incoming Governor Felipe Medalla told Bloomberg News last Friday that “we don’t defend” the peso, adding that the central bank would allow market forces to determine the value of the local unit.

“We reduce volatility,” Medalla said, referring to the BSP’s option to draw dollars from the country’s reserves to soothe currency fluctuations.

But Nicholas Mapa, senior economist at ING Bank in Manila, believes Monday's currency appreciation was unlikely because of the BSP's participation in the foreign exchange market.

"Unsure if BSP is in the market just yet although they do participate to limit volatility. Sharp swings intraday highlight the uncertainty and anxiousness of market participants. BSP May give more guidance to calm frayed nerves," Mapa said.

For Jun Neri, lead economist at Bank of the Philippine Islands, the BSP risks losing control over inflation if it won’t stem the peso’s depreciation.

Apart from taming prices, rate hikes can also support the peso by making local yields more attractive to foreign investors, thereby driving dollar inflows. The currency appreciation, in turn, could reduce imported inflation.

"Now that we are trading near P55.100, peso is down by more than 5% in about a month... Not a very reassuring pace of decline and will clearly de-anchor inflation expectations more... all in exchange for a 25 basis points incremental hike," Neri said in a tweet.

For Domini Velasquez, chief economist of China Banking Corporation, the peso will further depreciate owing to expectations that the US Federal Reserve will further hike interest rates.

"Peso will likely further weaken in the coming weeks especially as the Fed prepares to ramp up monetary tightening by another 75 bps rate hike in July. The BSP's next monetary board meeting is not until August where they can prevent further depreciation by either hiking its key policy rate by 50 bsps (vs the 25 bps forward guidance of the incoming BSP Governor)," she said in a Viber message.

"Further deterioration of reserves will limit the tool of the BSP to smoothen fluctuations in the FX market," she added.

PHILIPPINE ECONOMY

PHILIPPINE INFLATION

PHILIPPINE PESO

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