The peso is fast losing its appeal to money market traders. They are dumping the peso in favor of the US dollar, which is probably the strongest currency in the world now.
The Philippine peso is not the only currency that is losing its value in recent weeks. Every major currency in the world, including the euro, the Japanese yen, and the pound sterling, is feeling the crunch created by the mighty American dollar.
The peso yesterday fell to another all-time low of 57.18 against the greenback. It has depreciated against the US currency by a total of over P6 or 12 percent since the start of the year.
The dollar just the other day touched a 37-year high against the pound sterling of the UK and was near to a 32-year high of over 147.60 to the Japanese yen. The US currency, meanwhile, reached a parity rate with the euro.
A nation’s currency normally loses its value against the US dollar if there is a domestic political turmoil that results in a capital flight and loss of business confidence.
The same currency can decline quickly if the economy is close to collapsing because of unsound policies.
The peso’s current fall does not fall under such scenarios. It is weakening because of what the US Federal Reserve Board, or the US central bank, has done in recent weeks.
The Fed is raising the interest rates to stop inflation from rising further in the US.
Money market traders, wealth fund managers, and other investors are gravitating toward the US dollar because of higher returns than those offered by other currencies.
The US dollar has become a a safe-haven hedge against uncertainty and the global turmoil spawned by Russia’s invasion of Ukraine.
The interest rates in the US may increase to above 4 percent next year and stay there for a longer time until the inflation threat is doused. In contrast, the Bangko Sentral ng Pilipinas has raised the local interest rate to 3.75 percent in its own fight against rising inflation.
The US dollar, through investment outlets like the US Treasury Bills, will continue to attract foreign money because of better yields to investors.
The peso and other currencies will remain weak unless their interest rates are priced higher, or enjoy a better spread, than those offered by dollar-based financial instruments.
The exchange rate competition may continue to favor the US dollar in the coming months until the US Fed succeeds in its battle against inflation.
Our own central bank, thus, must respond firmer to neutralize the strong dollar.
