Global weakness

Many people are getting worried about the peso, which depreciated to P50 to $1 last week—a level not seen since the height of the global financial crisis in November 2008. There is indeed some nervousness in local financial markets resulting not only from the local currency’s weakness but also from the prolonged slide in the local stock market.

Exactly a year ago, the peso also weakened in value against the greenback to its lowest since 2009 due to what was then an expected increase in US interest rates, which would have the effect of luring funds to the American economy and away from emerging markets like the Philippines. The prospect of higher US interest rates boosts demand for the dollar as investors put their funds in US treasuries in anticipation of higher US yields.

The difference between the peso’s decline in 2015 and this year is that experts are 100-percent sure that the US Federal Reserve Board, the American central bank, will raise interest rates by the second week of December. It is, at this point, not just mere speculation. In the United States last week, surging demand already pushed the two-year treasury yield to its highest since April 2010.

Globally, other currencies are also weakening against the greenback. The US dollar, in fact, is now near its 14-year high, gaining against other major currencies and dragging the more vulnerable emerging-market currencies to record lows. The dollar last week gained against the euro to move just a little over 5 US cents above parity at $1.0515. The yen had sunk to an 8-month low and China’s yuan to an 8-year low. Elsewhere, the Turkish lira and Indian rupee also hit new bottoms. In the region, the surging dollar hit most emerging market currencies. The Malaysian ringgit was at a near 14-month low and the Indonesian rupiah fell to a near 6-month low.

Analysts cite the stronger economic data from the world’s biggest economy as supporting the dollar’s strength. They also expect the greenback to continue strengthening due to the impact of US President-elect Donald Trump’s policies focusing on ramping up fiscal spending that, in turn, will spur growth and inflation and eventually force the US Fed to raise interest rates to keep consumer prices in check.

Aside from this, they also point to a number of political developments in Europe that make investors wary of putting funds into riskier assets like emerging market stocks and currencies. For instance, the European Central Bank had warned that global political shifts such as Trump’s election could add to existing vulnerabilities such as rising US interest rates and revive worries about the euro zone’s weaker economies.

The weakening of the peso has been anticipated. The peso’s breach of the 50:$1 level was its expected reaction to the projected early rate increase by the US Fed, with other Asian currencies also moving in the same direction, Finance Secretary Carlos Dominguez III has explained. While the government watches currency movements, what the head of President Duterte’s economic team wants to avoid are abrupt changes in the exchange rates.

Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. added that the volatility in financial markets was indeed global. He said the expectation was that US interest rates were going to rise as the new US administration would push for spending for higher economic growth. This, in turn, could trigger higher inflation and therefore higher interest rates there, he said, “so we see the flow of capital out of emerging markets and back to the US.”

The last time the peso touched P50:$1 was on Nov. 15, 2006, when it closed at P50.09. Historically, the peso reached an all-time low of P56.34:$1 in October 2004 and a record high of P37.84:$1 in May 1999. So why is the peso depreciating? The simple answer is that the dollar is strengthening against nearly all other currencies, not just the peso. But not to worry, as the consensus forecast for the year remains below P50:$1.