The Philippine peso is expected by Japanese financial giant MUFG Bank Ltd. to linger at the ₱56 level against the United States (US) dollar in the third quarter of 2025 before appreciating until early next year.

In its latest Foreign Exchange Outlook report dated July 1, MUFG’s research arm forecasts a weaker peso than its previous projection, after the local currency depreciated to ₱56.31:$1 in June from ₱55.73 versus the greenback at end-May. The peso slid to the ₱57:$1 level when the Israel-Iran war erupted last month, even as it quickly rebounded following the ceasefire.

“We mark to market our USD/PHP forecasts and now expect USD/PHP at ₱55 by the first quarter of 2026 from ₱54 previously. The Israel-Iran conflict and the resultant oil price jump certainly led to a disproportionate negative impact on PHP, which is one of the more vulnerable currencies in Asia to oil price spikes given its relatively large current account deficit,” MUFG Global Markets Research said.

“More importantly, it’s also crucial to remind ourselves of the fundamentals before the oil price shock happened, and whether these drivers have changed for PHP. Our key message is that many of the positive factors we mentioned previously have not changed outside of geopolitical risk premia, and as such, we remain comfortable in our view for PHP to strengthen modestly against the dollar,” it added.

As such, MUFG expects the peso to trade at ₱56 in the third quarter of the year, before appreciating to ₱55.5 in the fourth quarter, and ₱55 in the first quarter of 2026. A slight dip to ₱55.5 versus the US dollar is projected by the second quarter of next year.

The peso’s anticipated relative strength against the greenback would come on the back of “low inflation, continued space for rate cuts, FDI [foreign direct investment] improvement, a likely trade deal with the US, coupled with strong infrastructure spending,” even as geopolitical risks would likely linger, MUFG explained.

MUFG forecasts the Bangko Sentral ng Pilipinas to reduce interest rates further—by 50 basis points (bps) before year-end—to bring the policy rate down to 4.75 percent from the current 5.25 percent.

The succeeding reductions in key interest rates following June’s 25-bp rate cut are expected as “inflation [is] expected to remain well within the central bank’s inflation corridor this year, absent oil price shocks,” MUFG said.