(STAR) By Des Ferriols - Stocks and the peso rose to record levels yesterday as a deluge of US dollars further buoyed the local bourse and underpinned an upbeat outlook for the economy.

The peso soared to a new seven-year high, closing at P44.350 against the US dollar.

Robust stock trading, also triggered by expectations of strong corporate earnings for the third quarter, pushed the composite index up by 2.58 percent to close at 3,873.50.

“Our record-breaking performance is a clear indication that our market stands on solid ground,” Francis Ed Lim, president and chief executive officer of the Philippine Stock Exchange Inc., said in a statement.

“Measures to plug government’s budget deficit and induce a drop in interest and inflation rates, along with reforms from within the PSE, have helped a lot in improving our appeal to investors,” he added.

He said “favorable factors” explained the huge daily turnover, which averages P5.45 billion from P2.32 billion last year. He praised the government for its support and voiced confidence that “we can further accelerate the market’s advance if we can put in place a more enabling business environment.”

The peso opened at P44.75 to the dollar and even fell to P44.83 during the session, but the strength of inflows pushed the currency all the way up to close at the intra-day high of P44.35 to the dollar, despite efforts by the Bangko Sentral ng Pilipinas to temper the rise.

Traders said the BSP was seen in the market trying to limit the gains of the peso, but investors continued to buy high yielding regional currencies.

Traders said the central bank stepped in when the peso struck P44.50 to the dollar in an attempt to smoothen the volatility of the exchange rate. However, the peso held its ground.

Another trader said the markets were also elated by the decision of the BSP to cut its headline policy rates last week, lowering overnight borrowing and lending rates by 25 basis points.

Some experts said BSP’s move was designed to make the peso less attractive to international investors and curb its strength.

The peso has risen about nine percent this year against the US dollar and about eight percent against the yuan or renminbi. China is one of the Philippine’s key export competitors.

A stronger peso may make exports, which comprise about 43 percent of the economy, less competitive.

The economy grew 7.5 percent year-on-year in the second quarter, the fastest pace in two decades, President Arroyo said in August.

Economists say the Philippines, hobbled by political crises and bloody insurgencies, needs several years of at least seven percent economic growth for such growth to make a dent on efforts to reduce poverty.

Yesterday’s close brought the peso to the level that could serve as launching pad for a further ascent to P44 to the dollar. The market said it would depend on how aggressive the central bank would intervene in the coming days.

The peso has appreciated by 10.5 percent against the dollar so far this year, making it the best performing currency in Asia, second only to the Indian rupee.

The BSP, however appears helpless, raking up losses of over P50 billion from its foreign exchange operations. Some relief is expected following its policy rate cut but the central bank is also mopping up liquidity while it is keeping the peso stable.

The weakness of the dollar combined with the strength of dollar inflows was expected to push the peso even higher this year, going up to as high as P42:$1 next year and P41:$1 in 2009.

“The BSP has been trying valiantly to keep the volatility of the peso down but banks said monetary officials could go only so far in keeping the peso from appreciating,” HSBC Asia-Pacific economist Frederic Neumann told reporters. He said the strength of the peso merely reflected the structural weakening of the dollar, a factor that the BSP would not have the capacity or the inclination to counter. “The BSP is stepping in occasionally but we think the peso will continue to appreciate because the BSP’s ability to buy dollars is limited,” Neumann said.

He pointed out that every time the BSP bought dollars from the market, it put more pesos into the system, which it would then siphon off using its monetary tools.

“This is very costly and we can’t expect the BSP to intervene indefinitely,” he said. “We think the BSP will be happy to let the peso rise as long as it’s not so volatile,” he added.

Neumann said the strong peso has actually provided a buffer for the economy from high import prices. “So we think it will be a gradual appreciation,” he said.

This year, Neumann said he expected the peso to average at P44 to the dollar and by next year, the currency would appreciate further to an average of P42 to the dollar before climbing to P41 in 2009.

He stressed that the strength of the peso would contribute more to the economy and that although it was hurting certain sectors, the economy as a whole would benefit from its shielding effects. With AFP

Chief News Editor: Sol Jose Vanzi

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