MANILA, Philippines — The Philippine peso sank on Friday to its lowest level in history at P56.77 against the US dollar as the greenback’s rally ravaged currencies across the globe.

The local currency also posted its new record intraday low of P56.90:$1 on the local spot market as investors worldwide anticipate further interest rate hikes by the US Federal Reserve.

Friday’s drop surpassed the October 2004 level of P56.45 per dollar at the height of the fiscal crisis declared by then President Gloria Macapagal-Arroyo.

The peso depreciated for the second consecutive day from P56.145:$1 on Aug. 31 and P56.42:$1 on Sept. 1. Higher interest rates are making the US market even more attractive to international investors, especially those that buy debt instruments. For those lending to the United States, higher interest rates mean greater returns.

This, in turn, is further heating up demand for the US dollar at the expense of other currencies elsewhere, including the Philippine peso.

Since trading at P50.99:$1 at the end of 2021, the peso has lost 11.3 percent of its value against the American currency.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the peso exchange rate weakened further on Friday following statements made a week earlier by officials of the US Fed about standing its ground to bring down elevated inflation with further increases in interest rates.

The rate of increase of prices of basic goods and services in the United States was pegged at 8.5 percent in July—still high but already lower from the 9.1 percent recorded in June, the highest for the world’s largest economy in over 40 years.

Ricafort said that with interest rates rising in the United States, the yield on the closely watched 10-year US Treasury bond has reached a new two-month high of 3.25 percent.

“However, this [strengthening of the US dollar was] offset by global crude oil prices near seven-month lows,” Ricafort said.

As of this writing, the de facto global benchmark Brent crude oil was fetching $95.12 per barrel while the Asian bellwether Dubai crude was pegged at $96.60 per barrel.

Dangerously high inflation

Earlier this week, The Netherlands-based ING Bank said in a commentary that US Fed chair Jerome Powell’s message last Aug. 26 was that in an era of dangerously high inflation, the central bank’s job is to take the steam out of demand.

The US Fed—like other central banks, including the Bangko Sentral ng Pilipinas (BSP)—does this by raising its policy rate, the benchmark that banks use as basis for setting interest rates on their lending activities.

With higher interest rates, consumers need more money to take out loans such as for buying or building houses or purchasing vehicles. This diverts funds from other consumption activities that would have been done if interest rates did not rise.

Demand for other commodities decreases because the money that would have been used to buy them would now be earmarked for servicing loans. The same consumers are also discouraged to buying new homes or durable equipment like vehicles and appliances, also to lower demand for these big-ticket items.

But with less money going around and demand for goods and services diminished, prices are then expected to go down.

ING Bank said that considering this plan of the US Fed, weakness in equity markets and softer data on consumer confidence and spending were not enough to keep the regulator from continuing on its tightening course.

“This environment should keep the dollar bid,” ING Bank said. “As we highlighted recently, the Fed seems quite happy with the stronger dollar and once again we are likely to hear the refrain from US officials that ‘the dollar is our currency and your problem.’”

Major bond sell-off

On Friday, ING Bank also said the US dollar was being further bolstered by a major bond sell-off as the financial markets await the latest update on US economic indicators—this time on employment data due out on the same day.

“The question now is whether jobs data will be enough to trigger another bullish dollar reaction,” the bank said. “The market may not really need a big surprise to fully price in a 75-basis-point [0.75-percentage-point] hike in September, and a respectable jobs report may be enough to trigger” a further appreciation of the dollar.

Also in August, BSP Governor Felipe Medalla said the BSP had ample leeway to keep the peso insulated from volatile forex markets.

Medalla said that while the BSP does dip into its international reserves to intervene in the forex market and prevent the peso from weakening too much, its main tool is the policy rate.

Since starting the normalization of its monetary policy stance in May, as opposed to pandemic-induced accommodation, the BSP’s overnight borrowing rate has increased by a total of 1.75 percentage points to 3.75 percent from a historic low of 2 percent.

The BSP’s gross international reserves (GIR) have decreased for the fifth straight month and sank below the $100-billion mark at $99.8 billion at the end of July.

The GIR first went past the threshold at $100.4 billion in September 2020 and peaked at $110.12 billion in December of the same year.