To say that the United States dollar has soared is an understatement. It has gone ballistic!
The US Dollar sneezed and all other currencies have not just caught a cold, they are being wheeled into critical care.Even the mighty British Pound has dropped to once unthinkable levels of parity against the US Dollar. Of course, it can be argued that the fall of the British Pound is also due, in part, to recent tax policy pronouncements by the newly installed Prime Minister, Liz Truss. I think, though, that the tax moves were only an accelerant to what was already a definitive decline of the pound. Similarly, the Japanese Yen has sunk to unnerving levels approaching Yen 150 to the US dollar. Both the British and Japanese governments took the unusual step of intervening in the currency market to help stabilize the value of their currencies.
Clearly, the Philippine peso was not spared. A year ago, the peso was trading at around 50 to the US Dollar. As of this writing at the end of day, September 29, the peso was trading at 59.20 to the US dollar. That is an almost 20 percent drop in value. A significant and debilitating hit, especially to importers.
The fall of currencies against the US Dollar was inevitable. The U.S. Federal Reserve has had to take on a very aggressive interest rate policy to slay runaway inflation that peaked at 9.1% in June before declining to 8.3% at the end of August. To rein in the historic rise in inflation, interest rates have increased from near zero at the start of the year to 3% for the first time since 2018. And that is not the end of the rate hikes. Forecasts indicate it could climb to as high as 4.4% by the end of the year, continuing its rise in 2023. The target inflation of the U.S. Fed is 2% so it still has a long way to go to get there.
Inflation pressures are not expected to fade anytime soon. It started with supply chain disruptions resulting from the COVID-19 pandemic. This was then fueled by a surge in demand with revenge spending, rising employment and increased money circulation.The nail in the coffin, so to speak, was theUkraine-Russo conflict. This is the most compelling pressure of all because it is cost-push in nature, driving energy and grain prices up. The effects were widespread and immediate, not creeping. Since the conflict has no foreseeable resolution, this continues to feed speculation and, thus, imbalances in the traditional supply and demand equations.
The sustained levels of elevated inflation and, thus, interest rates is almost certainly going to throw the US economy into recession. The Fed itself has admitted that there is no painless way to get inflation behind it. It would rather risk a recession than a second wave of rising prices that will be even more difficult to control down the road. Given the continued high levels of interest rates in the United States, flight to the dollar is expected to remain strong. Therefore, other countries will need to increase their own interest rates to defend their currency. This is causing global economic growth forecasts for 2023 to be revised downwards.
The strength of the US dollar is an unintended consequence of their battle with inflation. They are also very concerned about nipping their post-COVID economic recovery in the bud and reverting to recession. So the rest of the world has no choice but to play defense and rely on their own domestic recourses to reduce the impact of US monetary policy.
In the Philippines, the plummet of the peso to record lows is a big concern because of our import dependency for many of our essentials – oil, food, medicines. As well, there is little underlying support for the peso since we do not have a significant export base nor can we boast of Foreign Domestic Investments (FDI). Tourism is still struggling to get off the ground to bring in much needed foreign exchange. Our most important safety net is our OFW foreign exchange remittances that, thankfully, surge during the last quarter of the year in time for the holiday season.
What is crucial now is not how much further the peso – or other world currencies – will drop in value. The most important question is how fast it can recover. The strength of the US dollar happened so rapidly that business has not had the chance to digest it fully. Many businesses have been absorbingthe increased import costs hoping exchange rates stabilize. If the destabilization of currencies stretches, the Philippines will need to implement more belt tightening and monetary controls. Hopefully, the risk to our GDP growth will not be significant.
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