May 23, 2006 (STAR) By Des Ferriols - Wary over the possibility of another increase in US interest rates, market sentiments pushed the peso down to a four-month low yesterday, sending it to a close of 52.72 to a dollar, or seven centavos lower than Friday’s close of 52.65 to $1.

The peso hit an intraday low of 52.86 to the greenback following a week-long weakness that defied economic fundamentals including reports of a budget surplus that should have lifted sentiments in the currency market. Total transaction was heavy at $510.5 million on an average rate of 52.824 to $1.

The peso is considered one of the most vulnerable currencies in the region due mainly to low interest rates and high trade deficits that would have to be financed with foreign exchange.

Although the country’s external reserves are at its highest in years, market analysts said emerging markets, in general, would be volatile as long as the US Federal Open Market Committee (FOMC) keeps raising its interest rates.

The Bangko Sentral ng Pilipinas (BSP) said the country’s economic fundamentals remained stable, but there was also a pick-up in dollar demand and this contributed to the already weak regional sentiment.

BSP Governor Amando M. Tetangco Jr. said regional currencies are weak since markets are fearing another round of interest rate hike in the US.

Higher US rates tend to take funds away from emerging markets.

In the last two weeks, the peso has depreciated by around three percent although this was also seen as a relief for Philippine exporters who have been groaning under the impact of the peso appreciation early in the year.

Yesterday’s results fueled speculations that the peso would dip back to the 54: $1 level especially as domestic interest rates are also expected to start going up after falling below five percent.

On the other hand, remittances from overseas Filipino workers (OFWs) are expected to surge in the coming weeks, as workers abroad send money to their families ahead of the reopening of classes in June.

As US interest rates were raised to the highest level in five years, BSP has not touched its own policy rates, saying that the move of the US central bank did not change the scenario considered by the Monetary Board last week.

According to the BSP, the FOMC move was already contemplated by the MB when it held its own policy-setting meeting last week and ultimately decided to keep its policy rates unchanged.

At present, the BSP’s overnight borrowing rate is at 7.50 percent and the lending rate is at 9.75 percent. These rates were last touched in October 2005 when the MB approved a 25-basis-point increase.

Tetangco said the MB was more concerned with the movements in domestic prices and their impact on inflation.

"The Fed move doesn’t really change the equation, we’ve looked at that last week and we expected the US to raise its rates," Tetangco said. "Looking forward, we are guided by an assessment of the possible causes of inflation such as liquidity, foreign exchange rate and other factors."

Foreign Exchange Education Centre The Philippine Star 05/20/2006

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