The peso, which has fallen 13 percent against the dollar this year, is widely expected to decline further in 2009 due to the impact a worsening global economic downturn will have on foreign investments, exports and overseas remittances.

The peso ended this year at 47.52 to the dollar, 6.24 weaker than at end-2007, eroding a 19-percent gain it posted last year.

Even though the United States is in the grip of recession, the dollar has entered a long-term up-cycle, thus becoming a haven for risk-averse global investors, local currency dealers said.

“The peso-dollar market is a limited market,” a treasurer at a local commercial bank said Tuesday. “Direct foreign investment [inflows] may be small.”

The treasurer said foreign exchange remittances from overseas Filipinos could be sustained at current levels with minimal growth.

As the economy is expected to slow down and lead to low demand for imports, it may also bring down export earnings, the bank treasurer added.

The bank official predicted that the peso would hit a high of 46 to the dollar before it dropping to a low of 52 in the coming year.

“Most markets will continue to consolidate,” the bank treasurer said. “The stock market will trade sideways, but may touch a major low point. Interest rate may not be a significant factor as most are reaching optimal low levels.”

The central bank, Bangko Sentral ng Pilipinas( BSP), which recently cut its key overnight borrowing rate by half a percentage point and trimmed the reserve requirement on banks by two percentage points, has hinted of further monetary policy easing in 2009.

Lower interest rates typically make a currency less attractive. But given the bleak economic outlook, most central banks across the globe have aggressively eased monetary policies to support domestic growth.

In its outlook for 2009, Citigroup has projected that the peso will fall to 50 to the dollar in the next six months and to 51 in succeeding months before rising toward the 48-per-dollar level in 2010 and 2011.

The BSP has said it expects a continuing external surplus and ample foreign reserves to support the peso in the coming year.

“Reserves are built up precisely as insurance for rainy days—and haven’t you noticed, lately, it’s been raining quite heavily,” BSP Governor Amando Tetangco Jr. said in a published interview with New York think tank Global Source.

When asked whether he was worried about slowing capital flows, Tetangco said while it would be difficult to predict the extent to which risk market demand would retreat, the country’s foreign reserves would remain at comfortable levels.

The central bank expects its gross international reserves to settle at $36 billion at end-2008, equivalent to 5.5 months’ worth of imports.

Tetangco said, “We also have buffers to slow, even reverse, portfolio flows, including foreign exchange in the form of remittances from overseas Filipino workers and foreign exchange receipts from the growing BPO [business process outsourcing] sector, which is expected to remain robust even during this turmoil.”

The BSP expects the balance of payments to show a yearend surplus of $500 million, compared with an end-2007 record high of $8.5 billion, which was bolstered by overseas Filipinos’ foreign exchange remittances. Edited by INQUIRER.net