Politics

Peso weakens vs dollar ahead of Fed decision

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THE PESO ended weaker versus the dollar on Wednesday on expectations of another aggressive rate hike from the US Federal Reserve.

The local unit closed at P55.68 against the dollar on Wednesday, down by 38 centavos from P55.30 on Tuesday, data from the Bankers Association of the Philippines’ website showed.

The peso opened the session at P55.40 against the dollar. Its weakest showing was at P55.82, while its intraday best was at P55.37 versus the greenback.

Dollars exchanged went down to $1.01 billion on Wednesday from $1.43 billion on Tuesday.

“[The peso] will take its cue from tonight’s Fed meeting. A hawkish Fed should cause peso to slide once more while a dovish Fed could mean peso rallies a touch to close the week,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said on Wednesday.

“Sharp swings show that [the] BSP (Bangko Sentral ng Pilipinas) didn’t need to conduct their emergency jumbo rate hike and could have settled for more measured 50 bps (basis points) rate increases in June and August to achieve similar results,” Mr. Mapa said.

Likewise, a trader attributed the peso’s decline to the anticipated rate hike from the Fed.

“The local currency might depreciate further ahead of the release of the second-quarter US GDP (gross domestic product) report amid lingering concerns of a US recession,” the trader said.

For Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort, this is “considered a healthy correction after the strong peso appreciation of 80 centavos the previous day.”

“The peso is still among the strongest in three weeks ahead of the widely expected 75 bps Fed rate hike,” he said.

Market sentiment has been supported by the administration’s presentation of its economic plans, which include the shift towards more local borrowings to manage foreign exchange risks, he added.

The US Federal Reserve is widely expected to raise benchmark rates by at least 75 bps at its July 26-27 meeting to temper soaring inflation that hit another 40-year high in June.

The BSP Monetary Board on July 14 raised its benchmark interest rates by an all-time high 75 bps in an off-cycle review. The surprise move came ahead of its regular policy meeting scheduled on Aug. 18, and follows two 25-bp rate hikes each in May and June.

BSP Governor Felipe M. Medalla said then that the big rate increase was due to signs of growing price pressures, compounded by the impact of aggressive tightening by the US Federal Reserve on the peso, which could lead to higher inflation.

On Tuesday, Mr. Medalla said the central bank will likely hike borrowing costs by another 25 bps or by 50 bps at their August meeting with the Fed expected to continue firing off big rate increases, although he ruled out another off-cycle move.

Headline inflation was at a near four-year high of 6.1% in June, bringing the first-half average to 4.4%, above the BSP’s 2-4% target but still below its full-year forecast of 5%.

For Thursday, Mr. Ricafort sees the peso moving within P55.40 to P55.80 against the dollar, while a trader expects it to be between P55.60 and P55.80. — D.G.C. Robles