Where is the peso headed?
Last May, the Philippine peso began to part ways with the currencies of our comparable neighbors. Normally, our currency moves in tandem with those of our Asean-5 peers, with the appreciation or depreciation of the US dollar mainly determining which way they go. When the dollar appreciates or gains value, our currencies depreciate or lose value (i.e., exchange rates with the dollar go up); when the dollar depreciates, our currencies in turn appreciate (exchange rates go down).
The euro-US dollar exchange rate is a good indicator of the value of the dollar, which is usually assessed against a basket of six currencies called the “US Dollar Index” (DXY), where the euro accounts for nearly 60 percent. In the early months of 2025, the Asean-5 currencies mimicked the ups and downs of the euro against the dollar, as seen in how the peaks and troughs of the different currency graphs coincided. The exception was the Indonesian rupiah, which moved differently until April. But it was in May when our peso began moving in the opposite direction from the rest, with a widening gap to this day. By the end of July, the peso had lost around 4 percent of its value since May 1 (from P55.88/$ to P58.17/$), while the other Asean-5 currencies gained value ranging from 0.1 percent (Malaysia) to 1 percent (Thailand). As of last week, the peso had lost nearly 6 percent of its value since May 1 (to P59.13/$), while the Malaysian ringgit gained 1.2 percent. The currency graphs show how the Philippine peso is moving in its own direction, with a widening gap from our neighbors’ currencies. This implies that things unique to us are happening in our country, making our currency behave quite differently from the rest.
It clearly wasn’t the “floodgate” scandal that started it, as that issue erupted only in late July with President Marcos’ State of the Nation Address. So what happened in May that could have triggered the peso to lose value? The best explanation appears to be the good news that our inflation has slowed down to 1.3 percent, and how this has led market players to expect the Bangko Sentral ng Pilipinas to be more aggressive about lowering interest rates to stimulate the slowing economy. The BSP indeed sent such signals following the good news on inflation, which further fell to 0.9 percent in July. It reduced policy interest rates in June after a similar reduction in April, followed by another cut in August, then again in October—even as the US Federal Reserve (Fed) has signaled reluctance to cut rates in the face of persistently high inflation.
This tells me that the BSP is not afraid of a peso depreciation, the natural result of cutting our interest rates faster than the Fed does, because the less attractive financial yields here would induce an outflow of dollars. Meanwhile, our neighbors’ central banks can afford to keep close to the Fed’s actions in setting their own rates, because their interest rates have already been low anyway (2-3 percent for Malaysia and Thailand). Our own rates were raised to a stifling 6.25 percent in response to the inflation spike that peaked at 8.7 percent in 2023, with skyrocketing food prices. The BSP is quite aware, with a seasoned economist at the helm and more economists on the Monetary Board and staff, that a depreciated peso actually helps stimulate economic growth, and can be a good thing for many people. Winners include overseas Filipino workers and their families, export industries and their workers, domestic producers competing with imports made more expensive by peso depreciation, and others receiving income in foreign currency. Losers are those with foreign debts to pay (including the government), buyers of imported goods, or those who want to travel or invest abroad.
As I’ve long pointed out, a depreciated currency is both a blessing and a curse, depending on where one stands in the economy. This is why I avoid using value-laden words like “weak” or “strong,” and “best- or worst-performing” to describe currency movements. I prefer using “appreciation” or “depreciation,” which need not connote good or bad news. What would make the BSP worry and act is when depreciation happens too fast or unduly raises prices to hike inflation beyond target levels. So far, the BSP appears comfortable.
So where is the peso headed? There’s evidence that foreign capital is now being repelled by massive corruption exposed by the “floodgate” scandal, and even the usual Christmas surge in remittances may not hold back the continued decline of the peso. Besides, it’s also pointed out that when foreign currency converts to more pesos, less of it needs to be sent home to meet fixed peso requirements. All told, unless we can show convincing actions to stop corruption, especially jailing “big fish” offenders, projections of an exchange rate around P60/$ or more next year would not be off the mark.
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