Peso hits 12-year low vs US dollar
After BSP cut banks’ reserve ratio
The Philippine peso fell again on Friday, reaching a fresh 12-year low the day after the central bank announced its second cut in banks' reserve requirement ratio (RRR) in three months.
The peso dipped as far as 52.63 per dollar, 0.15 percent weaker than Thursday's close of 52.55, which was the lowest level since July, 2006.
"The peso will face stronger depreciation pressures in light of more money supply circulating in the domestic economy," Angelo Taningco, economist at Security Bank in Manila, said in a research note.
The currency has weakened against the dollar six of the past seven sessions.
The 1 percentage point reduction in banks' required reserves is expected to add around R100 billion ($1.90 billion) to the financial system after it takes effect on June 1.
The move, announced on Thursday, follows a similar size cut in March and reduces the RRR level – still one of the highest in Asia – to 18 percent.
Khoon Goh, head of Asia research for ANZ, said the RRR cuts are "designed to replace some of the liquidity lost through the BSP's intervention, so it's not seen as an easing."
Policymakers have repeatedly said that the RRR reductions, which had long been flagged, should not be seen to signal a change in monetary policy stance, but part of a shift towards more marketbased policy implementation.
On May 10, the central bank raised its benchmark interest rate for the first time in more than three years, to contain price pressures and manage expectations on inflation, which is at a five-year peak.
The peso has been weakening due in part to a rise in US interest rates, which has widened interest rate differentials between domestic and US yields. It is down 5.4 percent against the dollar this year.
ANZ's Khoon Goh said the external position is the "main driver for the peso weakness for
Aresurgent dollar is exposing weaknesses in the developing world, pushing investors to unwind long-held bets on emerging-market stocks, bonds and currencies.
Ripples from the dollar's comeback have spread. Indonesia's central bank on Thursday raised interest rates for the first time in four years to arrest a drop in its currency; Hong Kong's monetary authorities last week stepped in to prop up the territory's weakening dollar. The Turkish lira fell to fresh lows against the US dollar, while Brazil's real declined to its weakest level in more than two years. The MSCI Emerging Market Index, which measures stock performance, is down 11% from its January highs as of Friday.
Investors have piled into emergingmarket stocks and bonds for the last several years, often glossing over important macroeconomic or political issues as they sought returns that dwarfed those found in the developed world. Now that the dollar is strengthening and US yields rising, those shortcomings are becoming more glaring. A rising dollar makes it more difficult for countries to service debt denominated in the US currency, while rising yields diminish the attractiveness of foreign assets.
"The markets are now realizing they have to pay attention to fundamentals and assessing which countries are the most vulnerable," said Mark McCormick, North American head of FX strategy at TD Securities.
Investors are particularly nervous about nations with large currentaccount deficits, which comprise goods and services, trade and investment income, and those that rely on foreign investment to finance government spending, or fiscal deficits. Their dependence on the rest of the world for trade and government finances leaves them badly exposed when the dollar rises.
Argentina, whose currency and stock market plunged in recent weeks amid fears of a brewing financial crisis, carries both a current-account and a fiscal deficit. Other emerging markets with large current-accounts gaps include Turkey, with a deficit that stood at 5.5% at the end of 2017, as well as Colombia, South Africa, Indonesia, India and Mexico.
The current-account deficit "captures living beyond your means," said Robin Brooks, chief economist at the Institute of International Finance.
Politics are another worry. Mexico's peso, a top performer last quarter, has been dogged by concerns over the renegotiation of the North American Free Trade Agreement and a looming presidential election. Even the recent climb in oil prices has barely helped the currency of oil-producing Russia, where worries of fresh US sanctions against Moscow have dented the ruble.
As volatility spreads throughout emerging-market assets, investors who had arrived relatively recently are looking toward the exits, said Tim Atwill, head of investment strategy for Parametric Portfolio Associates.
"There is this large amount of new investors who have only experienced the good days. They'll start leaving. They're not used to the riskiness," he said.
Jumps in the dollar and US yields have burned emerging-market investors before. Many developing countries borrowed heavily in dollars and kept their currencies tightly pegged to the US currency in the 1990s. A swift dollar rally forced them to raise interest rates and push up their own currencies to unsustainable levels, damaging exports, hurting growth and eventually setting off the Asian financial crisis in 1997.