Why the peso could weaken to 65:$1
A stronger peso is usually interpreted as a sign of confidence, while a weaker peso is often dismissed as a temporary disruption caused by external shocks or speculative trading.
Yet history suggests that major currency trends rarely develop because of a single event. More often, exchange rates reflect the gradual accumulation of structural imbalances that markets initially underestimate, then eventually reprice much faster later on.
This was the main argument we discussed in June 2024 in this column, “Why the peso will continue to fall”, when the peso was still trading around P58 against the US dollar.
At that time, we argued that the peso’s temporary strength was unlikely to last because the country’s structural external imbalances remained unresolved. Persistent trade deficits, current account pressures and narrowing interest rate differentials with the United States continued to point toward further weakness in the peso over time.
At that point, hopes for monetary easing improved sentiment and the peso temporarily stabilized. Yet less than two years later, the peso has already weakened into the P61 range, which confirms much of our original thesis.
What initially appeared to be only temporary volatility now looks more like a deeper economic adjustment. The reason is that many of the structural pressures identified in 2024 still persist. In some cases, they have even worsened.
The Philippines continues to run a sizable current account deficit, with Bangko Sentral ng Pilipinas projections now pointing to a gap of roughly $20 billion or about 4 percent of gross domestic product. In simple terms, the country still requires more dollars for imports and external obligations than it generates from exports and other inflows. Over time, such persistent dollar demand tends to place continued pressure on the peso.
Oil prices are now adding further pressure on the peso, especially as tensions in the Middle East continue to keep global energy prices elevated. Since the Philippines remains heavily dependent on imported fuel, every sustained increase in oil prices raises domestic demand for dollars and worsens the country’s trade balance.
In many ways, the peso’s weakness today is no longer just a currency story but increasingly an energy-import story embedded within the structure of the economy itself.
Global conditions have also become less favorable for emerging markets. US interest rates remain elevated, which keeps the dollar attractive to investors. In such an environment, countries with persistent external deficits like the Philippines become more vulnerable to currency pressure.
But economics alone may no longer fully explain the peso’s continued weakness.
Currencies are also driven by confidence and uncertainty. Investors often react to rising risks even before these fully appear in economic data, which can place additional pressure on the peso.
Recent political tensions may also add pressure on the peso by increasing the uncertainty premium investors demand for local investments.
A 2021 study by researchers from the Pontifical Catholic University of Rio de Janeiro titled “The Impact of Political Risk on the Currencies of Emerging Markets” found that political risk can become embedded into emerging-market currencies through a risk premium mechanism.
Using the study’s risk-premium framework, the peso’s exchange rate can be simplified as: actual exchange rate = structural fair value + uncertainty premium.
If we apply this framework, one way to estimate the hidden value of uncertainty is to first estimate the peso’s structural fair value. For example, pure inflation-adjusted purchasing power parity may imply a peso value of around P52.20 to the dollar.
However, once structural external deficits and oil import dependence are considered, the peso’s macroeconomic fair value could move closer to the P58 range. The gap between that level and the current market rate near P61.70 could partly represent a growing political risk premium embedded in the currency.
In other words, if the peso’s structural fair value is around P58 while the market exchange rate trades near P61.70, then roughly P3.70 of excess depreciation represents uncertainty and political risk premium assigned by the market.
What this framework suggests is that the peso does not necessarily require a full-blown financial crisis to weaken toward P65. It merely requires markets to assign a larger political risk premium to the peso.
Should oil prices continue to rise, external deficits widen further or political uncertainty intensifies, the peso may eventually move toward P65 not because of panic alone, but because markets begin to reprice the country’s long-term vulnerabilities more aggressively.
Financial history shows that exchange-rate adjustments often occur gradually before accelerating once confidence weakens more decisively. Markets rarely overlook structural weaknesses forever.
The peso’s continued weakness, therefore, reflects not merely temporary volatility but growing concerns over the country’s external position and rising political uncertainty that increasingly affects investor confidence.
Unless these economic and political pressures ease, periods of peso weakness could become more persistent over time. In such an environment, a move toward P65 may no longer appear as an extreme outcome, but as a gradual adjustment to risks that markets begin to price into the currency.
Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 116th batch of RFP Program this June 2026. To register, e-mail at info@rfp.ph.
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