A Strong Peso Can Damage The Philippines Economy

I continue to get many questions regarding the strong peso currency trading paired to the dollar. Many Asian currencies were up this week against the dollar but the dollar rose a bit in the Philippines. It should be obvious to people that it isn’t that dollar is low because of a strong peso.  The peso is doing okay but the dollar is just weak.  A lot don’t know that yet and think the Philippines is inflating the value of the peso.

Strong PesoThere is an article on Manila Bulletin regarding how a strong peso hurts the Philippines. In this case they are focusing on outside investment.  A strong peso will make the Philippines less attractive to foreign investors. They believe the dollar sliding to below P42 will begin to harm outside investing. At P37.5 pesos to the dollar the Philippines economy will be severely hamstrung.

A strong peso is, of course, harmful in other ways. It hurts exports and it hurts the value of cash overseas Filipino workers earn.  The case these OFWs send back equal 10% of the economy and most if it is sent in the form of the US dollar. At least for now.

Another obvious negative is that a strong peso hurts exports.

The US dollar value was high in the mid 2000’s and there were many negative factors regarding that.

For now, the strong peso has not slowed growth. Inflation is more of a concern and the central bank of the Philippines is taking steps that should put the brakes on internal growth. They have raised interest rates several times.  Now they have raised the reserve requirements for banks. That means that banks in the Philippines must have more liquid assets on hand before they can make loans. Thus, banks will have less money to lend. This slows growth.

A central bank could also take steps to increase the value of its currency with the intent of slowing growth. Doing so has its negatives.  Those are the invisible hands most of us learned about in high school.

Invisible Hand Will Check A Strong Peso

Balance is necessary in an economy, if there is no balance the economy tends to force it back to a balance. There are reasons to increase a currencies value and lower it. That happens all the time with countries. The USA has clearly weakened the value of its currency because there is so little internal spending. The problem is, that move drove up oil prices.  This widened the trade gap and sent more dollars overseas rather than putting Americans back to work. Again, those invisible hands will come in and slap you if you take things too far.

This is a business cycle and while things are gloomy for the USA things are going to turn around. No, it wont be soon.  Things could even get worse for the USA but I hope not. The peso will not always be strong in relation to the dollar. The invisible hands will penalize the Philippines for forcing a strong peso.

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Filed under: Dollar To Philippine Peso

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