The Philippine Peso—Us Dollar Exchange Rate: the Impact of Strengthening Currency

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INTRODUCTION
The foreign exchange market is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. (wiki.org) The exchange rate is the price of a unit of foreign currency in terms of the domestic currency. In the Philippines, for instance, the exchange rate is conventionally expressed as the value of one US dollar in peso equivalent. The value of any particular currency is determined by market forces based on trade, investment, tourism, and geo-political risk. Every time a tourist visits a country, for example, he or she must pay for goods and services using the currency of the host country. Therefore, a tourist must exchange the currency of his or her home country for the local currency. Currency exchange of this kind is one of the demand factors for a particular currency. Another important factor of demand occurs when a foreign company seeks to do business with a company in a specific country. Usually, the foreign company will have to pay the local company in their local currency. At other times, it may be desirable for an investor from one country to invest in another, and that investment would have to be made in the local currency as well. All of these requirements produce a need for foreign exchange and are the reasons why foreign exchange markets are so large. (investopia.com) In this paper the researchers attempt to show the impact of strengthening peso against the US dollar and what are the consequences behind it. It also attempt to show where should the government place itself when the opposing interest of the public are at stake.

Background
The Philippine peso has been one of the strongest currencies in Southeast Asian Region for the past two year. It appreciated for an about 5.6 percent from year 2009 to 2010 where the exchange rate is 47.6372 to 45.1097 a dollar—that is based on the average data from BSP. This appreciation may attributed to the increasing inflows of remittances from the overseas Filipino workers (OFWs), the improvement in portfolio and direct investment, the deterioration of United States’ dollar economy for the past two years and the attractiveness of the Southeast Asian Region to the foreign investors. Peso appreciation would provide to a positive and negative effect on different sectors. The appreciation of Philippine peso would mean a reduction of debt servicing; this would also mean a reduction of prices of imported commodities in terms of peso when the product came here. However, this appreciation will reduce the purchasing power of Dollar that OFWs send to their family here in the Philippines and it would also mean that exported product will be less competitive abroad or if ever the exporter’s income will diminish. In this situation, the government is stock between letting the peso appreciate for the purpose of lower importation cost and lower debt services—or maintaining it at a lower value for the sake of OFWs and export sector. According to Senator Ralph Recto, chairman of the Senate Committee on ways and means, the Philippine peso could further appreciate up to P34 a dollar this year (2011). Inflow of remittances will continue to be strong and the outlook for foreign investments remains positive. The exchange rate is important for several reasons: (1) it serves as the basic link between the local and the overseas market for various goods, services and financial assets. Using the exchange rate, we are able to compare prices of goods, services, and assets quoted in different currencies. (2) exchange rate movements can affect actual inflation as well as expectations about future price movements. Changes in the exchange rate tend to directly affect domestic prices of imported goods and...
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