By Alex P. Vidal
“A flexible exchange rate is important, and it shouldn’t be artificially restrained because of the needs of the economy.”—Elvira Nabiullina
WHEN I made a transaction with the Western Union in Manhattan at around 9 o’clock in the morning yesterday (June 27), the exchange rate was US$1 to Philippine Peso 54.3132.
At past 12 noon the same day, I went to the Queens branch of San Franciso-based Lucky Money, Inc., a Filipino-run remittance center and the exchange rate was US$1 to Philippine Peso 54.85.
What does it mean?
The Philippine peso has breached the P55-level against the US dollar.
The Filipino currency finished at P54.78 versus the greenback, stronger than its previous close of P54.985.
We don’t know how will these changing of currency rates go on.
For us who remit to the Philippines, the current rate is “favorable”, to say the least for obvious reasons.
For our families, well, they may not feel if it is “favorable” or not since they are the receivers, but it’s their economic life that will serve as the basis if the mighty dollar against a weak pesos will give them satisfaction, in one way or the other.
In the previous years, when the US dollar threatened to “run away” from the Philippine peso in the exchange rate that went steady at $1=P48-P49 for a while, the most it could take was $1=P50-P51 then back to $1=P48-P49.
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“After the government started easing pandemic curbs, the peso has started to feel the pressure from rising imports, which were meant to meet improving domestic demand as the economy reopens,” reported the Philippine Star.
“Expensive global oil prices have also bloated the Philippines’ import bill, stoking more dollar outflows.”
The economy’s performance is at the heart of the decision to buy or sell dollars.
According to Ivestopedia’s Nick Lioudis, a strong economy will attract investment from all over the world due to the perceived safety and the ability to achieve an acceptable rate of return on investment.
Since investors always seek out the highest yield that is predictable or “safe,” an increase in investment, particularly from abroad, creates a strong capital account and a resulting high demand for dollars, explained Lioudis.
“On the other hand,” he explained, “American consumption that results in the importing of goods and services from other countries causes dollars to flow out of the country. If our imports are greater than our exports, we will have a deficit in our current account.”
With a strong economy, a country can attract foreign capital to offset the trade deficit.
That allows the U.S. to continue its role as the consumption engine that fuels all of the world economies, even though it’s a debtor nation that borrows this money to consume.
This also allows other countries to export to the U.S. and keep their own economies growing.
“From a currency trading standpoint,” Lioudis further explained, “when it comes to taking a position in the dollar, the trader needs to assess these different factors that affect the value of the dollar to try to determine a direction or trend.”
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Lioudis explained the causes why the dollar rises, the factors that influence the exchange rate, and what makes a currency weak:
What Causes the U.S. Dollar to Rise? There are a variety of factors that cause the U.S. dollar to rise, but the primary factor that it boils down to is demand for the dollar. If the demand for the dollar increases then so does its value. Conversely, if the demand decreases, so does the value. The demand for the dollar increases when international parties, such as foreign citizens, foreign central banks, or foreign financial institutions demand more dollars. Demand for the dollar is usually high as it is the world’s reserve currency. Other factors that influence whether or not the dollar rises in value in comparison to another currency include inflation rates, trade deficits, and political stability.
What Factors Influence the Exchange Rate? Factors that influence the exchange rate between currencies include currency reserve status, inflation, political stability, interest rates, speculation, trade deficits/surpluses, and public debt.
What Makes a Currency Weak? A weak currency is one whose value has declined in comparison to another currency. Weak currencies are those of nations that have poor economic fundamentals or an ineffective government. A weak currency can be derived from high levels of inequality, political instability, and high levels of corruption, public debt, and trade deficits.
(The author, who is now based in New York City, used to be the editor of two local dailies in Iloilo.—Ed)
