Asian currency war seen

Strong domestic fundamentals will help local policymakers avoid engaging in so-called “currency wars” in Asia that intensified this week with Vietnam’s decision to devalue its currency after initial shots fired by China.

In a move viewed as part of ongoing currency wars in the region, Vietnam’s central bank this week allowed the dong to depreciate for the third time this year to stay competitive with China’s declining yuan.

Keeping currencies weak help make a country’s products more affordable to foreign buyers, helping exporters and boosting economic growth—a key concern for export-reliant markets like Vietnam.

Domestically, a senior central bank official said engaging neighbors by forcing the peso to lose value made little sense.

“Directly devaluing the currency or reducing interest rates to force the currency’s weakening does not make much sense because there could be unintended, unwarranted consequences,” Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Guinigundo said.

While a weaker currency can help exporters, it makes imported goods more expensive for the local population. The cost of servicing foreign debt also rises with a weaker currency.

On Wednesday, the peso traded sideways to close at 46.35 to $1 from 46.355: $1 the day before. The local currency failed to hold on to early gains after it opened at 46.25: $1, which was its strongest point of the day. The peso’s close was its intra-day low.

Volume was $555.50 million, rising from Tuesday’s $468.60 million.

The BSP maintains a flexible policy for the peso, which is allowed to move up or down depending on market forces. Monetary authorities intervene in the market to smoothen out spikes in the peso’s value.

Guinigundo said exporters might lose part of their competitiveness against counterparts in other countries, where currencies had weakened substantially.

The official said countries forcing their currencies to decline had economies that rely heavily on exports. The Philippine economy, for its part, stands on domestic pillars.

“From a macroeconomic standpoint, we have resilient domestic factors including consumption, private capital formation and public spending,” Guinigundo said.

“Competitiveness (for exporters) comes easy with devaluation but the more durable, more sustainable sources of external competitiveness go beyond that: lower cost of power, lower cost of doing business, better quality goods, quick turnaround time,” he said.