Why is the Peso getting weaker? (For the common tao)

The Philippine peso (PHP) exchange rate with the United States dollar (USD) has weakened at historical levels recently. The first week of September 2022 saw the lowest, least competitive rate of nearly PHP57.00 to a USD, something that will be etched on the history books.

Immediate effects of this may not be felt by any typical Filipino who does their grocery shopping or casual dining at a fast food chain. Anyway, the current prices are already leaping due to the externally-induced inflation. Overseas Filipino Workers (OFWs) may also be unfazed by the exchange rate because on a non-technical point-of-view, higher exchange rates mean more money in PHP for their families. However, the weaker peso will worsen inflation and cause local prices of commodities, especially imported items to become more expensive. If you have been a fan of eating spam, then you might want to set aside that desire as these may be costing more.

The last record low exchange rates was in 2004 when the USD was worth PHP56.45.

The simplest reason behind this is that the USD which is the default global currency is becoming stronger which generally lowers the values of all other currencies. The US Federal Reserve (which functions similarly with our own Bangko Sentral ng Pilipinas), strategized to battle out the inflation that is going on in the United States. They did this by increasing the interest rates which attracts American investments that guarantee a higher rate of return. In addition, they want Americans to keep their money instead of spending it as it caused inflation.

Inflation in the US

Many experts believe that the US is currently experiencing a demand-pull inflation. It means that there are so much money in circulation with so little goods and services available to spend it on. In economics, there is what we call the law of supply and demand. And one of the principles is that when there is low supply and a high demand, the price increases. As the price increases, inflation is accelerated.

Inflation itself has also taken its toll in the international market given that rapid globalization has made all economies interconnected. Therefore, whatever the US suffers, or any large economy for that matter, would generally affect others.

Among the many technical reasons why inflation has gone up at uncontrollable rates is because the stimulus that the US provided in the later part of the pandemic allowed Americans to purchase more things with their increased disposable income. However, due to revenge-spending, local supply of goods have diminished in higher rates with the increased demand. International tensions in Europe brought about by the Russian invasion of Ukraine also disrupted the global supply chain and made things costlier to produce.

With that, the US is in a tricky situation given that any decision they make that affects their economic standing would domino to all the countries of the world.

Increase in Fed interest rates

To combat this, the US Federal Reserve increased interest rates with the hope of reducing demand for goods. How does this work? Giving higher rates of return from the interests, it makes American investment more attractive.

Interests also mean higher borrowing cost which will therefore also ease spending. Eventually, the demand for goods and services would lower to normal and manageable levels. With the economic principle shared earlier, it will mean that with the lower demand and ample supply, prices of goods will eventually decrease into normal levels. Inflation is eased, at least everybody hopes.

What lies ahead

With everyone considering the USD as the safeguard for the value of money, investors would stock up on dollars. As mentioned, American investment is also getting more attractive with the higher interest rates. In the investing side, it is advantageous, it earns you money; but on the borrowing side, it makes you lose more money. Investors, big ones, would usually be driven towards investing in the dollar-denominated investments. Financial experts would suggest that this condition builds a stronger dollar than other local currencies.

A report of CNN Business notes that half of the world’s trade are invoiced or charged in USD. This will turn up bills for imports much higher with the stronger dollar.

To illustrate, the iPhone 14 which launched earlier this week now cost PHP56,990 for its baseline model compared with the iPhone 13 which cost about PHP49,990 which at that time, there was a PHP49 to USD on average exchange rate. Although the phone comes with new features, its dollar price range did not increase. But when it hits the shelves in the Philippines, it cost more than it was before.

Will it affect me?

OFWs may rejoice at first with the exchange rates getting more pesos for each dollar or whatever currency for that matter. However, it is only the tip of the iceberg. Goods which generally require materials from abroad would entail more acquisition costs and the Filipinos will need to deal with the price increases. Despite more pesos for now, it projects “more pesos for the same quantity of goods”.

The Philippines already suffers a lot of shortage in basic goods, especially in food items like rice and sugar. As the government plans to import, you know where this is heading with the PHP to USD exchange rate in mind. The country also suffers inflation now and even if the US is battling it out their way, their remedy may mean a heavy blow for other economies like ours.

The best way survive the condition we are in is to spend conservatively at our individual levels. This means spending on the more important things, the “needs”. Set aside the “wants” for now and maximize our limited resource like time to allow us to find secondary or backup sources of income. In that way, the food on our tables might cost more but we have some extra pesos to brave the weakening peso.

Published by Ilonggo Engineer

Ilonggo Engineer or Ray, is a civil engineer and a writer who strongly advocates for road safety, technology literacy, and social equity.

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