The dollar fell to 47.75 to 1 USD on Thursday. A while back, I had two expats show up and blast me for my articles on the relationship between the Philippine Peso and the US Dollar. They did cause me to take a deeper look into the situation. The result of my research was that they were grossly ignorant.
The central bank of the Philippines, Bangko Sentral ng Pilipinas (BSP) is not boosting the Peso value at this time. In fact, it is trying to boost the dollar’s value and prevent it from falling too fast. A weak dollar hurts the Philippine economy. This is mostly due to Overseas Filipino Workers that often earn dollars and send them back to the Philippines. It is these remittances that have kept the Philippine economy stronger than most thought it would. However, the full story is not yet in, things could still get worse before they get better. Professional investors are acting as if they believe the Philippines is now strong enough to make investments in the Philippines.
The peso is getting stronger as the US economy shows signs of improvement, investors are feeling more confident about investing in higher risk assets as those high risk assets often bring higher profits. Those more risky assets are often found in the economies of developing nations.
The influx of the US dollar will cause its value to fall in the Philippines. The BSP has stated its purpose is to stabilize the dollar to peso value and to prevent the currency’s exchange rate from changing to quickly. The BSP keeps extra reserves on hand to help them take these position that will often result in losses.
Besides lowering the value of remittances from overseas, the falling dollar reduces exports to the USA. It is a valid reason for the BSP to act. Though, laissez-faire capitalist might say that governments should not interact at all and let the market control the price of commodities and currencies without any interference. That kind of thinking led to the Great Depression in the late 1920’s and would have led to another one in 2009. However, there is always a downside to these kinds of actions. The growing deficit in the USA is an obvious problem. This deficit grew when the US government stepped in to help struggling financial and the huge stimulus bill to lessen the down turn there. In general, deficits are not good for a strong dollar.
For more information, visit Business World Online.
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