THE Philippine peso has become as one of Asia’s weakest currencies, pressured by a hawkish US Federal Reserve and a strengthening dollar that have weighed broadly on emerging market currencies.
In a market note Monday, Japanese bank MUFG said the peso, along with the Thai baht and South Korean won, has led regional currency losses since the Federal Open Market Committee (FOMC) meeting on June 18 due to widening interest rate differentials and expectations of a prolonged restrictive US monetary policy.
The shift reflects a “higher-for-longer” US rate narrative under new Federal Reserve Chair Kevin Warsh, who has taken a hawkish stance focused on controlling inflation. Core personal consumption expenditures (PCE) inflation remains above 3 percent and labor market conditions remain strong, prompting markets to price in another Fed rate hike around October.
MUFG said demand for the dollar remains firm despite a modest easing in Treasury yields. Both the two-year and 10-year yields are above 4 percent, and elevated inflation-adjusted real yields continue to underpin the greenback.
“Even if nominal yields consolidate in the near term, the underlying support for the dollar remains intact,” MUFG said.
The peso has not been spared despite offering relatively higher interest rates than some regional peers. MUFG said the currency has not been “sufficiently insulated from depreciation pressures given elevated US rates.”
Further peso weakness could be limited, however, if the Bangko Sentral ng Pilipinas (BSP) resumes or extends monetary tightening — though MUFG cautioned this is contingent on the absence of another energy price shock.
The BSP’s Monetary Board has already raised key policy rates twice this year to 4.75 percent.