Peso weakens to 6-month low

The peso weakened to its lowest level in six months yesterday, closing at 53.40 to a dollar as the market continued to speculate on interest rates ahead of the US Federal Reserve meeting.

At the Philippine Dealing System (PDS), the peso tumbled by 14 centavos from Friday’s close of 53.26 to the dollar.

The currency went down to as low as 53.42 at mid-trade before finally closing at 53.40 to the dollar.

Mark Canizares, investment analyst at CitisecOnline, said the market will be poring over the US Federal Open Market Committee’s statement for signals on future rate actions, which could also push China to tighten policy.

"The Fed action will also put the BSP on the spotlight," said Canizares, noting that economic indicators suggest the BSP won’t follow any immediate rate adjustment in the US.

Currencies in emerging markets have been volatile in the last few weeks due to speculations that the US Fed would opt for another 25-basis point hike in US benchmark rates.

Another hike in US rates is expected to siphon funds out of emerging market in search of better yields in the US where rates have been going up steadily since last year.

The US Fed is scheduled to meet later this week and the BSP will be conducting its own policy meeting on June 29.

Although the BSP has given repeated assurances that a US Fed rate hike did not automatically signal a corresponding increase in BSP policy rates, market sources said investors are even more uncertain about future rates.

The last 25-point increase in US rates was supposed to be the final adjustment in a long period of calibrated adjustment but rising US inflation rates unleashed speculations that US Fed chief Ben Bernanke would bat for another rate hike to curb inflation.

BSP Deputy Governor Diwa Guinigundo said the BSP’s policy rates were not out of alignment and the only adjustment necessary were in the secondary market rates which had already adjusted and settled down anyway.

Despite yesterday’s depreciation, however, the peso has come a long way from its low of 56:$1 during the time when the Arroyo administration was having serious political crises amid a runaway budget deficit.

Exporters are complaining that the peso was appreciating way too much but even third-party observers such as the International Monetary Fund (IMF) said the level of the exchange rate was not a threat to the country’s medium-term competitiveness.

At the conclusion of its annual review of the country’s economic

performance, the IMF said in its report that competition from China and the Asian region in general explained some of the recent weakness in export growth.

However, the IMF said the situation did not primarily reflect an overvalued exchange rate, pointing out that this was "rarely cited as a factor impeding investments in the Philippines."

The peso has steadily climbed from its 56:$1 bottom to as high as 50.90 to the dollar especially after the Arroyo administration announced that it has outperformed its deficit target for 2005.

Exporters have gone as far as saying that the BSP should step in and keep the peso from appreciating further but monetary officials have so far resisted pressures to do so, saying that competitiveness had more to do with infrastructure rather than the exchange rate.

The IMF backed up the BSP in its 2005 Article IV report saying that the peso-dollar exchange rate has had little to do in determining investor preference between the Philippines and its more attractive neighbors.