MANILA, August 26, 2003  (MALAYA) Political noise drove the peso to close at a historic low of 55.42 to the dollar despite the central bank's announcement that it is ready to sell dollars.

"The scandals left and right, all this political noise is not helping. The peso had lost two percent since the July 27 mutiny. The peso lost a lot of ground in a short time," a bank trader said.

The peso had been weakening since the mutiny, the court-ordered one-year suspension of central bank Governor Rafael Buenaventura, and the money laundering charges aired against President Arroyo's husband, Miguel.

Bangko Sentral ng Pilipinas deputy governor Amando Tetangco said that the central bank will provide liquidity (dollars) if needed.

Traders however said that dollar purchases remained normal at $113 million at the spot market. The demand remained legitimate coming from corporations to pay for importations or to cover their other future foreign exchange exposures.

"If this buy-up is legitimate, it will be pointless to throw good money after bad," one trader said.

"Even if the macro fundamentals are sound, they tend to be overshadowed by the noise of non-economic factors," Tetangco said.

"We would provide liquidity if necessary," he said.

Bankers said that if the peso breaches 55.50 today, the central bank may be forced to use interest rates to protect the peso.

They expect that the tiering system will be again put in place.

To deter speculation in the peso before the Iraq war, the central bank hiked the reserve requirement for commercial banks to eight percent from seven percent on March 20, squeezing an estimated $224 million in liquidity from the financial system.

Yesterday, the peso dipped to a low of 55.47, opened at 55.28 and inched up at 55.27.

A commercial bank trader said once the 55.50 psychological barrier for the peso is breached, the market will likely test 55.75, the all-time low for the peso.

Tetangco said the weakness of the peso is expected with the dearth of capital flows and the seasonal demand from importers.

Tetangco also pointed to the expected recovery of the United States' economy as among the major factors affecting the movement of the peso and of the other regional currencies.

Traders said the weakness will persist until the end of the year. The pressure on the currency, however, was aggravated by political incidents that have strong economic bearing.

The Philippines has a limited ability to support the peso as its gross foreign reserves stand at just over $16 billion.

The bank's monthly policy meeting will be held on Thursday.

Reported by: Sol Jose Vanzi

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