With the return of United States (US) President Donald Trump’s tariffs on the horizon, the Philippine peso may be advantaged by the economy’s relatively less exposure to global trade, according to Japanese financial giant MUFG Bank Ltd.

“We are most positive on the currencies of domestic-oriented economies such as India, the Philippines and Indonesia, either because we expect growth-inflation balance to improve attracting capital inflows, [and] the likelihood of trade deals with the US for all three,” MUFG Global Research said in its Asia FX outlook report for the second half of 2025, published on July 4.

However, MUFG cautioned that the peso and domestic inflation would face pressures if tensions re-escalate in the Middle East and global oil prices soar.

“The Israel-Iran conflict and the resultant oil price shock certainly led to a disproportionate negative impact on the Philippine peso, which is one of the more vulnerable currencies in Asia to oil price spikes given its relatively large current account deficit,” it noted.

To recall, the peso quickly slid to the ₱57:$1 level after Israel attacked Iran in June; it just as speedily rebounded versus the greenback when a ceasefire between the warring nations was announced.

“It’s also important to remind ourselves of the fundamentals before the oil price shock happened, and whether these drivers have changed for the Philippine peso... Many of the positive factors we mentioned previously have not changed outside of oil prices and geopolitical risk premia, and as such, we remain comfortable in our view for the Philippine peso to strengthen modestly against the dollar,” MUFG said.

The Japanese bank last week forecast a weaker peso than its previous projection, after the local currency depreciated to ₱56.31:$1 in June from ₱55.73 versus the US dollar at end-May.

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 is projected by the second quarter of next year.

The bank sees inflation in the Philippines averaging a manageable 1.8 percent in 2025, supported by declining domestic rice prices as well as lower risks to transport and electricity costs.

MUFG is also bullish about a potential trade deal with the US to reduce average tariffs below the 17-percent reciprocal level, which would support external trade.

Meanwhile, actual foreign direct investment (FDI) is forecast to improve following a surge in approvals, particularly in the renewable energy (RE) sector after the easing of foreign ownership rules, which MUFG said would help offset the country’s current account deficit, currently around 3.5 percent of gross domestic product (GDP), and support the peso.

Despite some expected political noise and slower reforms post-2025 midterm elections, infrastructure development is projected to remain robust, helping sustain economic growth in the near term, MUFG added.