Why the Peso Weakened to Record Low P56.77 vs $1

The peso closed at P56.77 to the dollar on Sept. 2, a new record low that underscores how the greenback is in high demand as a safe-haven asset as the global economy recovers from the pandemic.

Friday's close surpassed the previous record of P56.45 in October 2004, when the Philippines had just emerged from a presidential election that was tainted by allegations of fraud.

EXPLAINER IN FILIPINO: Kumusta Naman ang Piso at Bakit Ito Mahina Kontra sa Dolyar ng U.S.? 

The dollar has strenthened to a point that it has reached parity of 1:1 against the euro, which is traditionally stronger than the U.S. currency. The dollar is also headed for parity against the pound, which is historically stronger, according to analysts polled by Bloomberg.

The U.S. Federal Reserve's rate-hiking spree has propped up the value of the dollar as monetary policy tightening, analysts said. Higher interest rates tends to attract inflows and increase investor confidence, thus strengthening the dollar.

For emerging economies like the Philippines, a strong dollar will mean higher debt costs since governments borrow in dollars, according to the World Bank. This also means imports will become more expensive, which is especially crucial for countries that don't produce their own oil.

Another drag on the peso is the Philippines' ballooning trade deficit, which means the country imports more than it exports, resulting in higher demand for dollars.

However, Overseas Filipino Workers are expected to send dollars back home in time for the Christmas season, and is expected to help prop up the peso, analysts said.