The peso weakened to a seven-year low against the US dollar Tuesday, dragged down by the lingering uncertainty on the timing of the US Federal Reserve interest rate hike.
The peso lost P0.16 to close at 48.52 Tuesday from 48.355 Monday. It was its weakest level since it averaged 48.62 on Sept. 4, 2009, at the height of the global financial crisis.
Daily volume turnover reached $775 million, higher than $299 million on Monday.
“The peso’s weakness mirrored the trend in the region, where most of the currencies declined against the greenback,” Nicholas Antonio Mapa, research officer at the Bank of the Philippine Islands, said in a statement.
“It is a rough day for global currencies with the peso simply tracking the move of global currencies with the dollar roaring back to life on increased chances for a Fed rate hike,” Mapa said.
The dollar rose versus all major currencies Tuesday after investors boosted expectations for a Federal Reserve interest-rate increase this year. European equities and US index futures declined after a retreat in Asia.
US dollar gains are “entirely linked to the fact that the market has been upwardly rerating expectations of a December rate hike,” said Sue Trinh, head of Asia foreign-exchange strategy for Royal Bank of Canada in Hong Kong. “Three weeks ago, the implied probability of a December hike discounted by fed funds futures was under 50 percent, today it is close to 70 percent.”
Mapa said foreign selling in the local equity market also pressured the peso. Mapa said a mild correction would be possible Wednesday. The Philippine Stock Exchange index fell for a fifth day Tuesday to a four-month low.
The peso depreciated 3.1 percent against the greenback this year, making it one of the weakest performing Asian currencies.
Earlier, Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. said the peso’s weakness was driven mainly by external factors, particularly the expected rate hike by the US Federal Reserve this year.
“I think the volatility will continue until there is a clearer action or decision on the part of the Fed,” Tetangco said.
Fitch Ratings’ BMI Research said the peso could possibly weaken beyond 50 to a greenback in the coming days if President Rodrigo Duterte’s intense war on drugs plus his continuous tough talking triggered prolonged political uncertainty.
BMI said the peso’s weakness in September was due to the “deteriorating investor sentiment” after Duterte hit back at the US after the latter lashed out at his war on drugs.
“In the event that these fears translate into something more tangible leading to prolonged political uncertainty, we believe that a further slide of the peso beyond 50 to US dollar could be likely,” BMI said.
It said that a selloff in the Chinese yuan and an expected interest rates hike by the US Federal Reserve before the year ends could trigger “broad-based emerging currency weakness” that will impact the peso.
BMI expects the peso to average 47.95 a dollar this year, 48.50 next year and 48 in 2018.
ING Bank Manila senior economist Joey Cuyegkeng said the peso was not seen to depreciate too much this year as the country’s solid macroeconomic fundamentals continued to shield it from volatilities.
Cuyegkeng revised his peso exchange rate forecast per dollar by yearend to around 47.50 from 46.60, taking into consideration the volatility in the financial markets.
Economists from the First Metro Investment Corp. and University of Asia and the Pacific see the peso trading between 48 and 49 versus the greenback this year.
The inter-agency Development Budget Coordination Committee maintained a foreign exchange target of 45 to 48 per US dollar from 2016 to 2018. With Bloomberg