Peso weakens as Fed’s decision on rates hangs

Volatility in the global financial market will continue until the United States Federal Reserve (the Fed) gives a clearer path for its key interest rates, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said.

Tetangco said external factors are the primary driving force behind the peso’s weakness, but noted the effect was not only on the local currency, but also on other currencies in the region.

The peso closed the week at 48.50 against the US dollar, which is a new seven-year low. “This has really caused market volatility.

I think the volatility will likely continue until there is a clearer action or decision on the part of the Fed,” Tetangco said.

Markets and analysts initially eyed four rate hikes by the Fed this year, after the 25-point increase in Dec. 2015, from zero to 0.25 points to 0.25 to 0.50 points.However, mixed economic data from the US continue to crop up, leading the Fed to maintain key rates.

Analysts now consider one rate hike this year, in December, or after the US presidential election. Tetangco said risk aversion has risen because of uncertainties, with Fed officials split on their positions.

He said developments on major German banks is also among investors’ concerns, with speculations that the Deutsche Bank, Germany’s biggest bank, may possibly need government aid eight years after the collapse of Lehman Brothers.

Divergence of monetary policy in Europe, Japan and the US, with the latter on tightening mode, is another factor, he said. Domestic factors like corporate dollar demand is also in the picture, he said. Tetangco, however, said companies’ dollar demand “is obviously not negative.” “It indicates that you’re growing.

Business and corporations are importing their requirements that they can use to further expand output in the economy,” he added.