Monetary authorities will allow markets to chip away at the peso’s value amid heightened risk aversion among investors, who remain on edge due to uncertainty over global financing conditions.
In line with the movement of other Asian currencies, the peso has fallen in recent weeks as the dollar rallies in anticipation of a rate increase by the US Federal Reserve. At the start of the week, the peso fell to a five-month low of 45.025-to-$1, reflecting investors’ growing preference for the dollar to the detriment of emerging-market asset classes.
“Markets tend to have heightened volatility when new information comes or is released, especially when such relates to the Fed,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said.
At the weekend, US government data showed an improvement in the American job market, pushing the greenback higher. Senior US Federal Reserve officials have said that the condition of America’s labor market would play a large role in the decision on when rates would be raised and by how much.
Benchmark interest rates set by the US Fed have been at record lows since the height of the 2008 global financial crisis. Fed officials have hinted that rates might soon be increased this year as the American economy showed more signs of recovery.
Higher rates in the United States are expected to suck away investors’ cash parked in emerging markets where yields are better.
“While gradual moves by the Fed are something the markets have come to expect, we should also bear in mind that the Fed has said its next moves would be data dependent,” Tetangco said. “Therefore, markets would be well-served to be watchful of data also so that the possibility of a sudden market squeeze would be avoided.”
A weaker currency makes imported goods more expensive for Filipinos. Paying for foreign obligations also becomes a larger burden, especially for the government and peso-earning local businesses. Conversely, the depreciating peso benefits exporters and other businesses that earn in dollar. Families that receive remittances from migrant workers also receive more cash for every dollar sent to the Philippines if the peso weakens.