Peso to 40 or 50 to a dollar?

On Friday the Philippine peso closed at 44.75 to a dollar, signaling that perhaps the peso intends to stay below the 45 level.

It is interesting that just a very few months ago, there was nearly panic in the streets that the peso was appreciating too fast and all sorts of dreadful effects would come if the peso moved toward 45.

Now the “experts” are saying that the peso could even be at 40 to the dollar before year-end. Obviously, I do not put much credibility on these comments as the foreign-exchange markets are quite unpredictable at times, and the trend can change very quickly.

Months ago there were constant comments about how an appreciating peso was disastrous for the overseas Filipino workers’ (OFW) remittance recipients. Every day I was receiving an e-mail or two saying how the government needs to do something NOW to protect the purchasing power of the families of OFWs, who are dependent on dollar inflows.

Of course, the government rightly and wisely did not interfere with the exchange rate, and the peso appreciated another 10 percent during the last six months.

The e-mails I receive now seem to have accepted the fact that the peso is stronger against the dollar or, more accurately, that the dollar is weak against the peso. These e-mails are encouraging everyone to as quickly as possible convert any dollar holdings into pesos.

My response: Not so fast.

The strength or weakness of any economy has little direct bearing on the exchange rate of that country’s currency. The economic effect is indirect in that it is how the central bank and the government’s finance department handle the strength or weakness that affects currency rates.

The US economy shows signs of weakness and the Federal Reserve lowers interest rates. That interest-rate drop makes foreign money less inclined to change currency into dollars and place the money in bank time deposits. Foreign money might be able to earn more in their home- country banks.

However, an offsetting factor might be that a “cheaper” dollar would make other types of investments more attractive. This is what is happening now with foreign companies buying into US companies because US prices are attractive, which is why the US stock market just reached a new historic high.

As mentioned before, the Philippine peso is not strong against the dollar; the dollar is weak against the peso, as it has been against most all currencies. The weakness of the US dollar actually began in 2003. At that time, the euro was priced at $1. Now it takes $1.41 to buy one euro. I think we will soon see a reversal of that trend.

When you compare the peso with other currencies besides the dollar, the appreciation picture changes. The historical price action of the peso to the Japanese yen, euro, Singapore dollar and British pound actually shows a different trend against the US dollar.

A technical analysis of these currencies says that the peso may be reaching the top and is due for some depreciation. The same chart pattern holds true for the Saudi riyal, the Bahrain dinar and the Malaysian ringgit.

As much as I dislike making predictions beyond the short term, P42 to a $1 seems likely, but I have a hard time seeing P40 to a $1 in the charts. I simply do not think that the depreciating dollar is going to continue over the longer term.

And all the panic about an appreciating peso seems very overdone.

For the OFW families, I doubt seriously if they “hoard” dollars, waiting for the best possible rate. The probability is that when the overseas worker accumulates his remittance, he sends it to the family and they convert it to pesos because they need the money. For them, it is unfortunate that the peso is not 56 to $1.

However, since none of us mere mortals have any control of exchange rates any more than we do over the weather, we must adjust and live with it.

Lately, too, were several articles and columns about the appreciating peso hurting our call-center and outsourcing businesses. I find the arguments overstated also for two reasons.

First, marginally profitable Filipino and foreign-outsourcing businesses have been hurt badly by the peso appreciating over the last year. Welcome to business reality.

As a result, there is an ongoing consolidation of the business that is both healthy and natural. Larger firms can better absorb higher costs due to the currency movement. Further, they are financially stronger and more efficient.

Second, India, our biggest competitor for the business, has seen its currency appreciate similar to the peso.

The value of the peso is not worth losing any sleep for, except for a very few businesses and individuals. 

E-mail comments to: mangun@email.com.

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