The peso is at risk of crumbling to a record low of ₱63 against the United States (US) dollar if a protracted Middle East conflict drives oil prices higher and forces Washington to adopt a more hawkish policy stance.

Estimates by the Japanese financial giant MUFG Bank Ltd. show that in a risk scenario where the US-Iran military conflict protracts—consequently sustaining elevated oil prices—the peso could slip further from the recent breaches of historic lows.

Just last week, the peso slumped to a record low of ₱61.567 against the dollar as the deepening conflict in the Middle East fueled safe-haven demand and clouded the outlook for the country’s trade balance.

This record immediately eclipsed the previous all-time low of ₱61.30 set just a day earlier.

Under cited circumstances, “we continue to see the Philippine peso as vulnerable and the US dollar-peso rising towards the 62 to 63 levels, especially if this is combined with a more explicitly hawkish US Federal Reserve,” MUFG analysts wrote in a commentary published last Friday.

MUFG has revised its baseline outlook for the peso, now expecting the US dollar-peso pair to trade within the ₱60.5:$1 to ₱61.5:$1 range over time, reflecting expectations that rate cuts by the US Federal Reserve will be delayed until September.

This shift suggests that global monetary policy uncertainty continues to weigh on emerging market currencies, including the peso.

“Our modelling work shows that interest rate differentials together with the trade deficit are the two most important variables driving the pair’s long-run trend,” MUFG said, noting that the Philippines’ external position remains sensitive to swings in global commodity prices.

With oil prices staying elevated, the country’s import bill is likely to remain high, putting added pressure on the peso.

“With more uncertain timing over Fed cuts and still elevated oil prices, the bias in the near term is for the peso to underperform Asian and G10 FX,” the Japanese lender said, implying that the local currency could lag behind regional peers and major currencies in the near term, particularly if global risk sentiment deteriorates further.

Domestic factors, particularly rising rice prices, are also exerting additional pressure on the peso.

“With domestic rice prices rising further in April, and if this continues, this will also put further pressure on foreign exchange (forex) weakness, all things equal.” Higher food inflation could complicate the policy outlook and weigh on investor sentiment.

Still, MUFG maintained that the peso could regain footing over time under its base case scenario.

“Nonetheless, we expect US dollar-peso to move lower directionally over time in our base case,” it said, citing expectations of a gradual de-escalation in geopolitical tensions that would ease oil prices.

MUFG also noted that the local currency appears undervalued at current levels. “US dollar-peso at current levels is ‘cheap’ relative to fair value,” the lender said, adding that this gap should historically take around seven months to close half its value over time.

Further support could come from improving fiscal conditions and tighter monetary policy, with MUFG pointing to “some initial signs of an improvement in government spending.”

Such an improvement could help ease policy uncertainty, alongside the Bangko Sentral ng Pilipinas’ (BSP) signaling of further rate hikes to contain inflation expectations. The central bank’s most recent hike to 4.5 percent was outweighed by external pressures.

Overall, MUFG said downside risks remain significant, noting that a prolonged conflict and persistently high oil costs could trigger a sharper weakening of the peso.