The peso fell to a new record low against the US dollar Thursday following a 75-basis-point hike by the US Federal Reserve to tame the persistently high inflation.
The local currency lost 49 centavos to close at an all-time low of 58.49, down from 58.00 on Wednesday. The drop followed a 52-centavo decline on Wednesday. Total trading volume reached $1.514 billion Thursday, up from $1.051 billion a day earlier.
Interest rate in the US now ranges from 3 percent to 3.25 percent, the highest since 2008. The Fed resorted to big rate increases to rein in inflation that reached 8.3 percent year-on-year in August, above the Fed’s benchmark target of 2 percent.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said the next resistance level for the peso would be 58.50 to 58.75 against the greenback. He said the Fed provided guidance on further interest rate hikes that would bring it to 4.40 percent by end-2022 and 4.60 percent in 2023 from 3.25 percent.
The peso depreciated by 14.7 percent against the US dollar or a total of P7.491 since closing at 50.999 in 2021, said Ricafort.
He said Fed rate estimates were rising in recent months, reflecting more aggressive adjustments in an effort to reduce US inflation from the 40-year high of 8.3 percent in August, after reaching an immediate high of 9.1 percent in June.
“Thus, the said Fed dot plot projections suggest a fourth straight Fed rate hike of +0.75 on Nov. 2, 2022,” Ricafort said.
Ricafort said the higher Fed rates led to stronger US dollar against major currencies, including the peso, on wider interest rate differentials in favor of the US currency.
BSP Deputy Governor Francisco Dakila remained unfazed by the peso’s depreciation, saying the movement was expected as the US dollar gained strength “given the US Fed tightening.” He said other currencies in the region were also weakening against the greenback.
“With the policy adjustment now, as well as the expected seasonal inflows from remittances especially during the Christmas season, there should be a lot of earnings available for repatriation from overseas Filipino workers [that should support the peso],” Dakila said.
The BSP on Thursday hiked by another 50 basis points to 4.25 percent the overnight borrowing rate to rein in the elevated inflation and support the value of the peso.
Bank of the Philippine Islands said the peso depreciation might continue in the medium term as imports would likely increase further on the recovery of the economy.
“Dollar demand may pick up and keep the exchange rate above the 56 level. Meanwhile, the possibility of tighter dollar supply may contribute further to peso depreciation. The Federal Reserve is expected to continue hiking aggressively this year,” the bank said.
“If the BSP continues to hike by 50 bps only in the last two meetings of the year, the differential with the US rate will go back to where it was in July when the BSP did an off-cycle hike. In this scenario, the peso may continue to depreciate and may even breach the 59 level. This may lead to another inter-meeting hike given the need to temper the depreciation of the peso,” BPI said.