Peso nears 53 to $1, closes at 4-month low

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Posted: 0:38 AM | May 25, 2006
Doris C. Dumlao
Inquirer

THE PESO slid to 52.95 to the dollar during trading Wednesday amid regional jitters caused by a renewed Asian bird flu scare, which added to pressure caused by a two-week sell-down on emerging markets' bonds and currencies.

Currency traders said the central bank, Bangko Sentral ng Pilipinas (BSP), sold dollars at 52.95 to the dollar stem the peso's depreciation. The peso thus recovered slightly but still closed at a new four-month low of 52.85 to the dollar as against Tuesday's close at 52.78.

It was the peso's weakest closing since hitting 52.875 to the dollar in January.

It nearly wiped out the peso's gains seen so far this year. At end-2005, the peso closed at 53.09 to the dollar.

At total of $547.2 million was traded Wednesday.

Other Asian currencies, led by Indonesia's rupiah, also tumbled on fears of the first possible case of human-to-human transmission of bird flu in Indonesia.

Traders also said offshore investors continued to unwind portfolio exposure in emerging markets, which led to currency sell-offs.

Traders said the BSP sold only about $10 million on the spot market, but as soon as the market saw this intervention, the peso recovered some losses.

"The market knows that the BSP might not let the peso break past the 53-to-one psychological level at this time because it might create further panic," a trader said.

In previous months, foreign investors were attracted by increased yields in emerging markets, given steady monetary and foreign exchange policies in bigger markets like the United States, China and Japan.

In past months, the United States had clearly stated it would curb its current account deficit and lure in Asia's excess funds while dealing with inflation at the same time. Japan indicated it would stick to a quantitative easing of monetary policy that allowed some uptick in inflation, and China said it would not deviate too much from the prevailing exchange rate.

With uncertainties now emerging on these policies, global investors have become more risk-averse and started to move funds away from emerging markets.

BSP Governor Amando Tetangco earlier said interest rates based on Treasury bill rates had fallen too low and should bottom out to make peso assets more attractive.

On the avian flu, the Asian Development Bank has said in a study that a pandemic could be substantially more damaging in both human and economic terms than the SARS.

A pandemic could affect consumer confidence and changing consumption and social patterns, and dampen investor confidence. It could also affect the availability of labor, as illness would force many workers to stay home.

"Governments will have to deal with an uncertain policy environment as they respond to the public health emergency and economic dislocation," the ADB study said.

"Markets have a tendency to overreact, which could exacerbate the economic impact," it added. With INQ7.net