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Peso Touches 55 vs U.S. Dollar, What's Next?

Why is the value of the local currency falling?
by The reportr team
Jun 28, 2022
Photo/s: Unsplash
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The peso breached the 55-level to the U.S. dollar on June 28, its lowest level in 16 years. To the consumer, this means higher prices of anything that is imported or produced using imported materials.

To the Bangko Sentral, which sets the benchmark for interest rates and influences inflation and the amount of money circulating in the system, this means additional pressure to catch up with the speed of rate hikes around the world, with the U.S. Federal Reserve setting the pace, analysts said.

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What's happening with the peso?

The P55 to $1 exchange rate was last seen recorded in October 2005, as the Philippines was gripped in political turmoil. Earlier that same year, purported wiretaps of then President Gloria Arroyo's phone conversations with ex-Comelec commissioner Virgilio Garcillano were leaked, and cast doubt on the legitimacy of her victory against the late actor Fernando Poe Jr. in the 2004 presidential elections.

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The local currency's weakness in 2022 shows how the managers of the world's economy should be fast to adapt in the COVID era, analysts said. When the pandemic started, interest rates were slashed to record lows, including in the Philippines, to encourage the public to spend more and keep businesses afloat.

When vaccines brought infections to manageable levels, people began to travel and spend more and businesses demanded more fuel to meet demand, causing inflation to accelerate. This is when policymakers like the Bangko Sentral, have to decide when to raise interest rates. 

On June 23, the BSP hiked the overnight rate, which banks use to price loans by 25 basis points, and signaled more increases were forthcoming.

Peso is worst-performer in Southeast Asia

Since the start of 2022, the peso has depreciated by 7.4%, making it the worst-performing currency in Southeast Asia for the year, said RCBC Chief Economist Michael Ricafort.

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Bank of the Philippine Islands Chief Economist Jun Neri said the peso has slid by 5% in the past month and was on course to overtake the Korean won as the second worst-performing currency in the entire Asia, next only to the Japanese yen.

The decline in the peso's value is "not very reassuring", Neri said, describing the 25-point increase in the overnight rate as "incremental".

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What's next for the peso?

ING economist Nicholas Mapa, in his personal Twitter account, said he expects "faster inflation and a weak peso" in the near term, given that the BSP is "dovish" or conservative when it comes to raising interest rates, as opposed to being hawkish.

Mapa cited the central bank's statement on Monday that the peso-dollar rate is market determined and that the regulator wouldn't interfere to prop up its value.

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