Universe of currencies

This is not the lowest the peso has fallen. But it is the lowest in a decade the peso depreciated against the US dollar.

If we consider a basket of currencies, however, the peso’s fall is hardly noticeable. All major currencies have retreated against the dollar. Another way of putting this is to say the peso is not falling; the dollar is rising.

For us, of course, the dollar is the most important foreign currency there is. Our outstanding debt is expressed in dollar terms. Our oil is purchased in dollars. It is the currency most easily tradable in the Philippine market. This is why our OFWs, even if they earn in fairly stable currencies, prefer to convert their savings to dollars when they come home.

Last week, our currency declined to P50:$1. That seems to be an emotional threshold. It managed to get a lot of people excited even as our currency lingered at close to that exchange rate for weeks.

The most important reason for the dollar’s strength is the decision of the US Fed late last year to increase its policy rates. Higher interest rates made it more attractive for currency holders to deposit in the United States, buy US commercial paper and purchase equities in the US stock exchange. People converted from other currencies to dollars.

That added to the market pressure for the dollar to rise. Even before the rate increase, the dollar was already seen as a safe sanctuary, given the predicament of the euro. The likelihood of US rate increases, through the last year, made it more attractive to hold dollars instead of yen or yuan. Anticipating the US rate increase, foreign hot money invested in our stock market sold down shares to convert to dollar holdings in the US stock exchange. The expected strengthening of the dollar made it wise to invest in US stocks.

At present, the US stock exchange has hit unprecedented highs. That reflects the currency dynamics described above much more than the marginal improvement in US economic performance.

Clearly, the peso-dollar exchange rate operates in a much larger universe. It does not operate in isolation from the dynamics of other economies and other currencies. We live in a highly integrated world where currencies recognize no borders.

It will be wrong to politicize the currency exchange movements, attributing it to a single factor such as, for instance, President Duterte’s language or the
seeming disarray in our mining policy. Although they might indeed affect currency exchange, such will only be minimal. The large forces inhabiting the universe of currencies are beyond our control.

The peso’s depreciation will surely inflict some pain on our people. It will affect the cost of fuel, which we import almost entirely. It will push up power rates. It will push up our overall inflation rate albeit
only marginally. The targeted inflation range remains the same.

Some good will also come from the realignment in exchange rates. A weaker peso will encourage exports, which declined the past few years because our currency was overvalued. It will, of course, magnify the peso equivalent of money remitted by our migrant workers. That will spur domestic demand and encourage more economic activity.

We can fight the depreciation, too, by raising interest rates like the United States did. But that will hurt us more. It will discourage investments and dampen economic activity. At the moment, our monetary authorities are convinced the domestic economy will be better served if interest rates are kept low and if the currency is allowed to depreciate. It may not seem like it at first blush, but the peso’s decline is actually a good thing in the long run.

Let us not get too excited about the peso’s depreciation. Allowed to float freely, it will find its “natural” level in the universe of currencies. That is the level that facilitates transactions optimal to our economic wellbeing. It will make exportation more rewarding and will encourage us to be more prudent with importation.

There is a reason foreign luxury goods flood our market: our currency is overvalued.