Peso trades on soft ground as dollar rides high on US policy

The Philippine peso traded at its weakest level in 11 years, largely due to tighter monetary policy in the US this year.

The local currency lost 1.528 percent of its exchange rate value to P50.480:$1 as of December 18 this year, from P49.720:$1 on December 29, the last trading day of 2016.

It is the “worst-performing” currency in Southeast Asia, Union Bank of the Philippines chief economist Ruben Carlo Asuncion told GMA News Online.

“One of the biggest issues that impacted the peso this year was the attempt at normalizing monetary policy in advanced countries, particularly the US. It was the uncertainty of the pace at ... raising Federal interest rates that had a huge influence on the peso’s movement in 2017,” Asuncion noted.

The Federal Reserve raised interest rates thrice this year—in March, July, and December.

Noises

“Although there were ‘noises’ that came out to impact the peso, it was monetary policy change that was most influential,” he said.

The Marawi siege, the declaration of martial law in Mindanao, and allegations of extrajudicial killings in relation to the campaign against illegal drugs were among the “noises” that influenced investor sentiment and the foreign exchange market.

Land Bank of the Philippines market economist Guian Angelo Dumalagan, however, emphasized that the peso depreciation was the widely impacted by interest rate hikes in the US which propped up the dollar.

“US policymakers previously suggested three rate hikes of 25 basis points each this year,” Dumalagan noted.

In its recently concluded two-day policy meeting this month, the Fed raised its fund rate for the third.

Greater benefit

ING Bank Manila senior economist Joey Cuyegkeng noted the market perceived a greater tolerance for a weaker peso as the Duterte administration’s economic managers view the pass through—of a weak currency—to inflation is lower and longer to materialize.

“A weaker peso would also benefit a greater portion of the economy including families of 10 million or so of OFWs and also families reliant on the outsourcing industry,” Cuyegkeng said.

Political developments on the domestic front had modest impact on the peso-dollar exchange.

“Politics and political noise including the Marawi siege and concerns over IS threat may have modestly contributed to the under-performance,” Cuyegkeng said. — VDS, GMA News