Last week, the peso breached 50 pesos per one US dollar.

Until August, it was 46 pesos to the dollar on

average.
This means the peso has depreciated by as much as 8.7 percent since August. One thing is sure, the peso
rate will fluctuate some more.
What the peso depreciation means. The peso depreciation affects many prices and income
situations. Let’s take a few.
Higher cost of foreign goods and services to us. The cost of foreign goods and services increases. For
instance, if one is traveling to other countries, the cost of travel (in local peso terms) becomes more
expensive: airline tickets , accommodations, meals, all purchases abroad.
Hence, a peso depreciation has the effect of discouraging the purchase of imports. Essential imports
would still be bought, however, but now at higher peso costs. For instance, crude oil that we need —
even if the dollar price remained the same — requires more pesos to bring it into the country for use.
Lower cost of Philippine goods and resources to foreigners. To foreigners, the cost of anything that we
sell to them — be it a good produced here or any resource we sell like labor, land rent, or capital service
— will be cheaper. Yet, the Filipino seller of the good receives more pesos per dollar of sale.
Hence, peso depreciation lowers the cost of our exports and attracts foreign businesses to want to buy
our goods, but our exporter increases their peso revenues from their sales.
OFW remittances. Remittances to his family by a Filipino worker abroad converts to more pesos for
every dollar value sent home. In short, the family receives more pesos per dollar sent. In general, this
improves the peso income position of the recipient.
Price inflation at home is a likely result. Domestic inflation is a likely outcome of exchange rate
depreciation, however. This results from the likelihood that local prices of goods — both home
produced and foreign-bought would rise in prices. However, the price impact of the peso
depreciation could be neutralized or reduced by a combination of policies — tax, spending, and other
sector economic policies.
Causes of recent peso depreciation. In last week’s column, I explained why the peso had
depreciated rather sharply: the US central bank’s anticipated interest rate hike; Trump’s election which
brings uncertainty because he had advocated changes in American policy on trade that would affect
world trade and investments; and President Duterte’s unfortunate rhetoric that impacts on foreign
investor sentiments towards our country.
All these have contributed to the sharp drop and volatility of the Philippine stock market index as well as
the observed peso currency depreciation.
Investors and businessmen make their decisions mainly to reduce the risks they face or to assure their
profits. They react to the perceived factors they encounter in their operations. A recent example — a
telling one — should remind us of the sensitivity of investment decisions to perceptions of local
conditions.
The Semiconductors and Electronics Industry in the Philippines (SEIPI) reported that orders amounting
to $50 million were lost to one company when President Duterte made angry statements directed at
President Obama in connection with US criticisms of the government’s war on illegal drugs.
Exchange rate depreciation as the main basis of trade and development policy. It should be
noted that well-planned exchange rate depreciations could be useful. It has proven to be a major
element in the case of the typically successful “East Asian model of economic development.”
Over time and at different episodes in their respective histories, South Korea, Taiwan, Thailand,
Indonesia, and Vietnam have used the depreciation of their respective currencies as the basis of their
export growth strategy.
Hong Kong and Singapore in their early years of growth have relied simply on removing many barriers to
trade (through their free trade policies) and have maintained an exchange rate that approximated the
market value of their currencies.
The two most successful Asian economies — Japan (during the early post-World War II period when it
was badly in need of reconstruction and recovery) and China (during its recent decades of massive
expansion) had relied on a weak currency to foster their trade and industrial growth.
It was only during the 1970s that the Japanese yen had appreciated dramatically to the level it is now, in
the whereabouts of slightly above 100 yen to the dollar. Early during the postwar period, the rate was
maintained at 360 yen to the dollar.
In the case of China, the currency had remained fixed at a favorable rate to the US dollar for years until
the last decade. Even as late as the 2016 US election, candidate Donald Trump had called China a
currency manipulator to favor its trade policy.
Philippine case. There have been episodes in our own economic development experience when, after
serious balance of payments and macroeconomic crises, the currency had weakened to the point of
rendering Philippine goods and resources very competitive as a result of exchange rate depreciation.
But in the same breath when export and industrial growth were about to expand and get further
encouraged, policy reversals restored old relative prices, thereby negating the gains from depreciation.
Such reversals happened through the maintenance of import restrictions, tariff regulations or raising
resource costs, such as restoring high minimum wages. At other times, it was through unintended
exchange rate appreciation.
It did not help also that there have been economic restrictions imbedded in the Philippine Constitution
against foreign direct investments in important, but prohibited areas of investments for foreign capital.
Today, even as the country faces new challenges and is open toward further liberalizing the investment
frontiers involving more foreign direct investments (through the announced agenda to amend the
restrictive economic provisions in the Constitution as stated in the government’s 10 point program), the
opportunities for economic success are less encouraging compared to other times.
I refer to the advent of the incoming Trump presidency in the US. If the road to the future is based on
the programs he had announced as a candidate, the uncertainties and directions are headed for gloomy
storm clouds. Under such an environment, depreciation as a strategy could prove less successful.

Last week, the peso breached 50 pesos per one US dollar. Until August, it was 46 pesos to the dollar on
average.
This means the peso has depreciated by as much as 8.7 percent since August. One thing is sure, the peso
rate will fluctuate some more.
What the peso depreciation means. The peso depreciation affects many prices and income situations.
Let’s take a few.
Higher cost of foreign goods and services to us. The cost of foreign goods and services increases. For
instance, if one is traveling to other countries, the cost of travel (in local peso terms) becomes more
expensive: airline tickets , accommodations, meals, all purchases abroad.
Hence, a peso depreciation has the effect of discouraging the purchase of imports. Essential imports
would still be bought, however, but now at higher peso costs. For instance, crude oil that we need —
even if the dollar price remained the same — requires more pesos to bring it into the country for use.
Lower cost of Philippine goods and resources to foreigners. To foreigners, the cost of anything that we
sell to them — be it a good produced here or any resource we sell like labor, land rent, or capital service
— will be cheaper. Yet, the Filipino seller of the good receives more pesos per dollar of sale.
Hence, peso depreciation lowers the cost of our exports and attracts foreign businesses to want to buy
our goods, but our exporter increases their peso revenues from their sales.
OFW remittances. Remittances to his family by a Filipino worker abroad converts to more pesos for
every dollar value sent home. In short, the family receives more pesos per dollar sent. In general, this
improves the peso income position of the recipient.
Price inflation at home is a likely result. Domestic inflation is a likely outcome of exchange rate
depreciation, however. This results from the likelihood that local prices of goods — both home
produced and foreign-bought would rise in prices. However, the price impact of the peso depreciation
could be neutralized or reduced by a combination of policies — tax, spending, and other sector
economic policies.
Causes of recent peso depreciation. In last week’s column, I explained why the peso had depreciated
rather sharply: the US central bank’s anticipated interest rate hike; Trump’s election which brings
uncertainty because he had advocated changes in American policy on trade that would affect world
trade and investments; and President Duterte’s unfortunate rhetoric that impacts on foreign investor
sentiments towards our country.
All these have contributed to the sharp drop and volatility of the Philippine stock market index as well as
the observed peso currency depreciation.
Investors and businessmen make their decisions mainly to reduce the risks they face or to assure their
profits. They react to the perceived factors they encounter in their operations. A recent example — a
telling one — should remind us of the sensitivity of investment decisions to perceptions of local
conditions.
The Semiconductors and Electronics Industry in the Philippines (SEIPI) reported that orders amounting
to $50 million were lost to one company when President Duterte made angry statements directed at
President Obama in connection with US criticisms of the government’s war on illegal drugs.
Exchange rate depreciation as the main basis of trade and development policy. It should be noted that
well-planned exchange rate depreciations could be useful. It has proven to be a major element in the
case of the typically successful “East Asian model of economic development.”
Over time and at different episodes in their respective histories, South Korea, Taiwan, Thailand,
Indonesia, and Vietnam have used the depreciation of their respective currencies as the basis of their
export growth strategy.
Hong Kong and Singapore in their early years of growth have relied simply on removing many barriers to
trade (through their free trade policies) and have maintained an exchange rate that approximated the
market value of their currencies.
The two most successful Asian economies — Japan (during the early post-World War II period when it
was badly in need of reconstruction and recovery) and China (during its recent decades of massive
expansion) had relied on a weak currency to foster their trade and industrial growth.
It was only during the 1970s that the Japanese yen had appreciated dramatically to the level it is now, in
the whereabouts of slightly above 100 yen to the dollar. Early during the postwar period, the rate was
maintained at 360 yen to the dollar.
In the case of China, the currency had remained fixed at a favorable rate to the US dollar for years until
the last decade. Even as late as the 2016 US election, candidate Donald Trump had called China a
currency manipulator to favor its trade policy.
Philippine case. There have been episodes in our own economic development experience when, after
serious balance of payments and macroeconomic crises, the currency had weakened to the point of
rendering Philippine goods and resources very competitive as a result of exchange rate depreciation.
But in the same breath when export and industrial growth were about to expand and get further
encouraged, policy reversals restored old relative prices, thereby negating the gains from depreciation.
Such reversals happened through the maintenance of import restrictions, tariff regulations or raising
resource costs, such as restoring high minimum wages. At other times, it was through unintended
exchange rate appreciation.
It did not help also that there have been economic restrictions imbedded in the Philippine Constitution
against foreign direct investments in important, but prohibited areas of investments for foreign capital.
Today, even as the country faces new challenges and is open toward further liberalizing the investment
frontiers involving more foreign direct investments (through the announced agenda to amend the
restrictive economic provisions in the Constitution as stated in the government’s 10 point program), the
opportunities for economic success are less encouraging compared to other times.
I refer to the advent of the incoming Trump presidency in the US. If the road to the future is based on
the programs he had announced as a candidate, the uncertainties and directions are headed for gloomy
storm clouds. Under such an environment, depreciation as a strategy could prove less successful.

Read more at https://www.philstar.com/business/2016/11/30/1646533/peso-depreciation-causes-and-

implications#bdTPP026a8fGc3A5.99

Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for
most major economies. The exchange rate of one currency versus the other is influenced by numerous
fundamental and technical factors. These include relative supply and demand of the two currencies,
economic performance, outlook for inflation, interest rate differentials, capital flows, technical support
and resistance levels, and so on. As these factors are generally in a state of perpetual flux, currency
values fluctuate from one moment to the next.
But although a currency’s level is largely supposed to be determined by the underlying economy, the
tables are often turned, as huge movements in a currency can dictate the overall economy’s fortunes – a
currency tail wagging the economic dog.
Currency Effects Are Far-Reaching
While the impact of a currency’s gyrations on an economy is far-reaching, most people do not pay
particularly close attention to exchange rates, because most of their business is conducted in their
domestic currency. For the typical consumer, exchange rates only come into focus for occasional
activities or transactions such as foreign travel, import payments or overseas remittances.
A common fallacy that most people harbor is that a strong domestic currency is a good thing, because it
makes it cheaper to travel to Europe, for example, or to pay for an imported product. In reality, though,
an unduly strong currency can exert a significant drag on the underlying economy over the long term, as
entire industries are rendered uncompetitive and thousands of jobs are lost. And while consumers may
disdain a weaker domestic currency because it makes cross-border shopping and overseas travel more
expensive, a weak currency can actually result in more economic benefits.
The value of the domestic currency in the foreign exchange market is an important instrument in a
central bank’s toolkit, as well as a key consideration when it sets monetary policy. Directly or indirectly,
therefore, currency levels affect a number of key economic variables. They may play a role in the
interest rate you pay on your mortgage, the returns on your investment portfolio, the price of groceries
in your local supermarket, and even your job prospects.
Effects Of Currency Fluctuations On The Economy
Currency Impact on the Economy
A currency’s level has a direct impact on the following aspects of the economy:
Merchandise trade
This refers to a nation’s international trade, or its exports and imports. In general terms, a weaker
currency will stimulate exports and make imports more expensive, thereby decreasing a nation’s trade
deficit (or increasing surplus) over time.
For example, assume you are a U.S. exporter who sold a million widgets at $10 each to a buyer in
Europe two years ago, when the exchange rate was €1=$1.25. The cost to your European buyer was
therefore €8 per widget. Your buyer is now negotiating a better price for a large order, and because the
dollar has declined to 1.35 per euro, you can afford to give the buyer a price break while still clearing at
least $10 per widget.
Even if your new price is €7.50, which amounts to a 6.25% discount from the previous price, your price
in dollars would be $10.13 at the current exchange rate. The depreciation in your domestic currency is
the primary reason why your export business has remained competitive in international markets.
Conversely, a significantly stronger currency can reduce export competitiveness and make imports
cheaper, which can cause the trade deficit to widen further, eventually weakening the currency in a self-
adjusting mechanism. But before this happens, industry sectors that are highly export-oriented can be
decimated by an unduly strong currency.
Economic growth
The basic formula for an economy’s GDP is C + I + G + (X – M) where:
C = Consumption or consumer spending, the biggest component of an economy
I = Capital investment by businesses and households
G = Government spending
(X – M) = Exports minus imports, or net exports
From this equation, it is clear that the higher the value of net exports, the higher a nation’s GDP. As
discussed earlier, net exports have an inverse correlation with the strength of the domestic currency.
Capital Flows
Foreign capital will tend to flow into countries that have strong governments, dynamic economies and
stable currencies. A nation needs to have a relatively stable currency to attract investment capital from
foreign investors. Otherwise, the prospect of exchange losses inflicted by currency depreciation may
deter overseas investors.
Capital flows can be classified into two main types – foreign direct investment (FDI), in which foreign
investors take stakes in existing companies or build new facilities overseas; and foreign portfolio
investment, where foreign investors buy, sell and trade overseas securities. FDI is a critical source of
funding for growing economies such as China and India.
Governments greatly prefer FDI to foreign portfolio investments, since the latter are often akin to “hot
money” that can leave the country when the going gets tough. This phenomenon, referred to as “capital
flight," can be sparked by any negative event, including an expected or anticipated devaluation of the
currency.
Inflation
A devalued currency can result in “imported” inflation for countries that are substantial importers. A
sudden decline of 20% in the domestic currency may result in imported products costing 25% more
since, a 20% decline means a 25% increase to get back to the original price point.
Interest Rates
As mentioned earlier, the exchange rate level is a key consideration for most central banks when
setting monetary policy. For example, former Bank of Canada Governor Mark Carney said in a
September 2012 speech that the bank takes the exchange rate of the Canadian dollar into account in
setting monetary policy. Carney said that the persistent strength of the Canadian dollar was one of the
reasons why his country's monetary policy had been “exceptionally accommodative” for so long.
A strong domestic currency exerts a drag on the economy, achieving the same end result as tighter
monetary policy (i.e., higher interest rates). In addition, further tightening of monetary policy at a time
when the domestic currency is already unduly strong may exacerbate the problem by attracting more
hot money from foreign investors, who are seeking higher yielding investments (which would further
push up the domestic currency).
The Global Influence of Currencies: Examples
The global forex market is by far the largest financial market with its daily trading volume of over $5
trillion – far exceeding that of equities, bonds and commodities markets. Despite such enormous trading
volumes, currencies usually stay off the front pages. However, there are times when currencies move in
dramatic fashion; the reverberations of these moves can be literally felt around the world. We list below
a few such examples:
The Asian crisis of 1997-98. A prime example of the havoc that can be wreaked on an economy by
adverse currency moves, the Asian crisis began with the devaluation of the Thai baht in July 1997. The
devaluation occurred after the baht came under intense speculative attack, forcing Thailand’s central
bank to abandon its peg to the U.S. dollar and float the currency. This triggered a financial collapse that
spread like wildfire to the neighboring economies of Indonesia, Malaysia, South Korea and Hong Kong.
The currency contagion led to a severe contraction in these economies as bankruptcies soared and stock
markets plunged.
China’s undervalued yuan. China held its yuan steady for a decade from 1994 to 2004, enabling its
export juggernaut to gather tremendous momentum from an undervalued currency. This prompted a
growing chorus of complaints from the U.S. and other nations that China was artificially suppressing the
value of its currency to boost exports. China has since allowed the yuan to appreciate at a modest pace,
from over eight to the dollar in 2005 to just over six in 2018.
Japanese yen’s gyrations from 2008 to mid-2013. The Japanese yen has been one of the most volatile
currencies in the five years between 2008 and 2013. As the global credit intensified from August 2008,
the yen – which had been a favored currency for carry trades because of Japan’s near-zero interest
rate policy – began appreciating sharply as panicked investors bought the currency in droves to repay
yen-denominated loans. As a result, the yen appreciated by more than 25% against the U.S. dollar in the
five months to January 2009. In 2013, Prime Minister Abe’s monetary stimulus and fiscal stimulus plans
– nicknamed “Abenomics” – led to a 16% plunge in the yen within the first five months of the year.
Euro fears (2010-12). Concerns that the deeply indebted nations of Greece, Portugal, Spain and Italy
would be eventually forced out of the European Union, causing it to disintegrate, led the euro to plunge
20% in seven months, from a level of 1.51 in December 2009 to about 1.19 in June 2010. A respite that
led the currency retracing all its losses over the next year proved to be temporary, as a resurgence of EU
break-up fears again led to a 19% slump in the euro from May 2011 to July 2012.
How Can an Investor Benefit?
Here are some suggestions to benefit from currency moves:
Invest overseas. If you are a U.S-based investor and believe the USD is in a secular decline, invest in
strong overseas markets, because your returns will be boosted by the appreciation in the foreign
currencies. Consider the example of the Canadian benchmark index – the TSX Composite – in the first
decade of this millennium. While the S&P 500 was virtually flat over this period, the TSX generated total
returns of about 72% (in Canadian dollar terms) during this decade. But the steep appreciation of the
Canadian dollar versus the U.S. dollar over these 10 years would have almost doubled returns for a U.S.
investor to about 137% in total or 9% per annum.
Invest in U.S. multinationals. The U.S. has the largest number of multinational companies, many of
which derive a substantial part of their revenues and earnings from foreign countries. Earnings of U.S.
multinationals are boosted by the weaker dollar, which should translate into higher stock prices when
the greenback is weak.
Refrain from borrowing in low-interest foreign currencies. This has admittedly not been a pressing issue
since 200, since U.S. interest rates have been at record lows for years. But they are on the move again
now, and at some point will revert to historically higher levels. At such times, investors who are tempted
to borrow in foreign currencies with lower interest rates would be well served to remember the plight of
those who had to repay borrowed yen in 2008. The moral of the story: Never borrow in a foreign
currency if it is liable to appreciate and you do not understand or cannot hedge the exchange risk.
Hedge currency risk: Adverse currency moves can significantly impact your finances, especially if you
have substantial forex exposure. But plenty of choices are available to hedge currency risk,
from currency futures and forwards, to currency options and exchange-traded funds such as the Euro
Currency Trust (FXE) and CurrencyShares Japanese Yen Trust (FXY). If you like to sleep a nights, consider
hedging currency risk in these ways.
The Bottom Line
Currency moves can have a wide-ranging impact not just on a domestic economy, but also on the global
one. Investors can use such moves to their advantage by investing overseas or in U.S. multinationals
when the greenback is weak. Because currency moves can be a potent risk when one has a large forex
exposure, it may be best to hedge this risk through the many hedging instruments available.