Peso drops to 2-year low then bounces; trades between P43-P44

MANILA, Philippines - The peso touched its lowest level in more than two years on Friday before bouncing back to close on a stronger note versus the dollar as investors realized the drop has been a “bit too overdone.”

The local unit appreciated by eight centavos to close the week at 43.72 from a 17-month low of 43.80 last Thursday. Dollars traded reached $1.084 billion, down from $1.407 billion the previous day.

During the day, the peso traded within a range of 43.63-44.17, the upper end being the weakest since February 2011.

“We actually saw the Indian rupee and the Thai baht also appreciate. I guess investors have realized (the drop) was already a bit too overdone,” Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, said in a phone interview.

“Investors who are not carried away by emotions and by a rather emotional environment are able to distinguish the countries that are fundamentally supported,” he added.

Financial markets around the globe have been rattled since Thursday by pronouncements from US Federal Reserve Ben Bernanke that stimulus measures will be scaled down “later this year.”

Earlier on Friday, the Bangko Sentral ng Pilipinas (BSP) reiterated that the economy, which expanded by 7.8 percent in the first quarter, remains one of those countries with “positive story” that should keep the peso afloat.

As of Friday, the peso, Asia’s second best performer last year, has already weakened by 6.5 percent against the US currency since Dec. 28, 2012. On average, the unit strengthened by 6.8 percent last year.

“Once all the noise has died down, the Philippine growth narrative will continue to remain fundamentally sound and we think that we will be seeing broad stability in the value of the peso,” BSP Assistant Governor Ma. Cyd Tuaño-Amador told reporters.

With regard to inflation, Amador said consumer prices will remain stable despite the peso’s weakness. A weak peso makes imports more expensive, thus may prompt importers to raise local prices to recoup their costs.

“There’s a considerable range that the peso can move before a breach of inflation target could happen,” Amador said.

Inflation settled at three percent as of May, falling at the low-end of the BSP’s three- to five-percent target range.

The inflation goal, together with a 42-45:$1 foreign exchange rate, is assumed under the budget that should allow the economy to grow between six- and seven-percent.

“We don’t look at a particular level of foreign exchange rate, it’s the volatility that we watch,” Amador said.