Peso breaches 45:$1 mark on inflation fears

Doris Dumlao
Philippine Daily Inquirer

Jitters over rising inflation dragged the peso Tuesday past the crucial 45-per-dollar mark for the first time in nine months and the peso would have tumbled further if not for central bank intervention, currency traders said.

Given prospects of inflation reaching a 14-year high and with global oil prices hovering above $140 a barrel, the peso continued its losing streak to end Tuesday at 45.01 to the dollar from Monday’s closing rate of 44.90.

The peso is trading at its lowest level since touching 42.20 to the dollar on Oct. 4 last year.

“The [closing rate] highlights further test toward the 45.50 levels in the near term,” said Banco de Oro Unibank chief strategist Jonathan Ravelas. “These levels were last seen in August 2007 when the US subprime crisis took center stage. The peso fell to as low as 47.12 then.”

“Sentiment is still high for peso weakness,” said Philippine National Bank treasurer Ramon Lim.

Lim said the central bank would likely defend the 45-per-dollar rate staunchly in the next few days.

For fiscal and economic budgeting purposes, the central bank and the national government have assumed a foreign exchange range of P42-P45 to the dollar this year.

Other dealers suspected the local central bank of unloading as much as $350 million on the foreign exchange market Tuesday to curb the peso’s fall. The volume of trading surged to $811.5 million from $504.5 million Monday.

The Philippines has also entered a season of strong corporate demand this third quarter, when businesses stack up their inventory ahead of the Christmas season.

The peso has weakened by about 8.3 percent so far this year, almost at par with the losses of the Indian rupee. The peso and the rupee are now among Asia’s worst-performing currencies, closely tracking the South Korean won, which has fallen by about 10 percent.

With unabated increases in oil prices, currency traders estimated that the country’s foreign exchange requirement for oil importation has reached $1 billion a month, exerting pressure on the peso.

“If oil hits $200 a barrel, it [the monthly requirement] can shoot up to $1.4-$1.5 billion,” a banker said.

The banker added that the central bank appeared reluctant to tighten its interest rates aggressively.

When inflation is rising, central banks tend to raise interest rates to mop up excess liquidity that could fuel consumer and business spending that, in turn, could aggravate inflationary pressures. In some cases, central banks also tighten interest rates when it sees the need to discourage speculation against the peso.

With editing by INQUIRER.net