Cratering peso touches 59-level as aggressive Fed props up dollar

MANILA, Philippines (Updated, 4:50 p.m.) — The Philippine peso touched the 59-level against the US dollar in early Wednesday morning trading, as a rallying greenback powered by a super aggressive Federal Reserve continues its rampage across currencies in the region.

The peso’s weakest showing for the day stood at P59.02 against the US dollar before paring some losses to close at P58.98, a tad stronger from its previous finish of P58.99.

It’s a weakness that mirrors the movement in other currency markets in the region, as the US Federal Reserve’s jumbo hikes to tame stubbornly high inflation stateside send the dollar to its strongest level in decades.

READ: Fed hikes rates again, warns inflation fight can't be 'painless'

Nicholas Mapa, senior economist at ING Bank in Manila, believes emerging markets can do “very little” in the face of an aggressive US central bank. As it is, other central banks are in a dilemma: either let their currency weaken and risk stoking inflation, or move in tandem with the Fed and drag down their economies to another recession.

“Early rate hikes, jumbo rate hikes have all been cannon fodder as (Jerome Powell) and company tighten policy to combat US inflation induced by ongoing Russian invasion of Ukraine,” Mapa said in a Viber message.

At its meeting this month, the Bangko Sentral ng Pilipinas hiked its policy rate anew, this time by 50 basis points in a bid to control multi-year high inflation. However, this was not enough to match the aggression of the US central bank, which raised its key rate by 75 basis points this month and indicated that more tightening would come.

So far, BSP Governor Felipe said there won’t be any emergency policy meetings after the one that happened in July. For ING Bank’s Mapa, the BSP would rather dip into the country’s foreign reserves than match the Fed to save the weak peso, which could fan inflation by pushing up import costs.

READ: BSP ready to intervene to defend faltering peso 

“With dollar strength looking like that, BSP will likely drawdown reserves built up over the last 2 years prior. From 2019-2020, BSP grew reserves by $23.8 billion. This year they’ve drawn down a relatively modest $5.5 billion for context,” he added.

But Jun Neri, lead economist at Bank of the Philippines Islands, said the possibility of another surprise policy meeting this year could not be ruled out.

"We think there is a big chance there will be an inter-meeting hike before November 17, which is the scheduled meeting of the BSP. We are simply anticipating that when the (Federal Open Market Committee) hikes by 75 bps on November 1, the BSP won't be able to wait for their scheduled November 17 meeting," he said. — Ian Nicolas Cigaral with a report from Ramon Royandoyan