Bangko Sentral: 'Strong dollar phenomenon' behind weaker peso, not local developments

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Metro Manila (CNN Philippines, June 23) — The Bangko Sentral ng Pilipinas (BSP) on Thursday allayed concerns over the continued weakness of the peso, chalking it off to a stronger dollar.

“When you look at how the peso has moved compared to other currencies in the region, it’s about there in the middle. So you can see that this is more a strong dollar phenomenon rather than something that is attributable to more domestic considerations,” BSP Deputy Governor Francisco Dakila Jr. said in a press briefing.

The Philippine peso finished ₱54.70 against the US dollar on Thursday, its weakest close since ₱54.74:$1 on November 21, 2005.

The peso slipped past the ₱54-per-dollar mark on Monday when it closed at ₱54.065 - then its worst performance in more than three and a half years. 

Economists mainly attribute the dollar’s strong performance to the more hawkish stance of the US Federal Reserve - which recently hiked interest rates by 75 basis points to arrest decades-high inflation.

However, this starkly contrasts with the BSP’s relatively dovish stance against surging commodity prices. The Philippine central bank announced a back-to-back rate hike of 25 bps this afternoon, going against some analysts’ expectations of a 50-bp increase.

This, despite the BSP now expecting inflation to zoom past the 2-4% target band both this year at 5% and next year at 4.2%. 

“The peso remains to be determined by the market so it's the market that’s the best judge of where the value of the currency should be. But we’ve also been emphasizing that the BSP can always come into the market to ensure orderly adjustment in the foreign exchange market,” said Dakila.

A stronger greenback bodes well for overseas Filipino workers as it means the dollars they remit have more value back home, while exporters can expect higher revenues should local currency fare worse than the dollar.

However, a weaker peso also translates to more expensive imports - which affect not only exporters who buy raw materials from abroad but also the general public, as the country imports its oil supply and pays for it with dollars.

Nomura Chief ASEAN Economist Euben Paracuelles told CNN Philippines that "the more fundamental driver of the currency weakness is the fact that the Philippines is running a current account deficit. There's always a natural demand for dollars domestically and the deficit. And the deficit is actually increasing and it's going to increase given (the) oil prices, vulnerability to imported food prices."

He said this has to be addressed, otherwise the pressure on the Philippine currency will continue whether or not the BSP goes aggressive.

Paracuelles stated that the direction of the peso is quite clear at this stage. If the pressures persist and inflation continues to increase, the BSP needs to combine the use of foreign exchange reserves and raise rates to reduce the pace of depreciation, he added.

The country's policymakers are also having a difficult task in containing inflation, he noted.

Paracuelles argued that the peso "could play a role in exacerbating inflation and inflation expectations domestically if it continues to depreciate."

"The economy has to slow. This is what's going to drive inflation lower. Demand has to come down and policies have to be coordinated," he pointed out.