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MANILA - The peso on Friday closed to a four and a half-year high against the US dollar after the Federal Reserve announced a third round of easing to prop up the world’s biggest economy.
At the Philippine Dealing System, the peso closed at 41.42, stronger by 33 centavos from Thursday's 41.75. The local currency traded between 41.585 and 41.400, with total volume reaching $1.232 billion from $1.006 the previous day.
A local currency trader said Thursday's trading was muted as market awaited additional details of the third easing from the Federal Open Market Committee overnight. Market players sold some of their dollar holdings, allowing the greenback to weaken.
The Fed announced it would have to do another round of asset purchases to boost the US economy and cut unemployment. It would buy $40 billion of mortgage debt every month until the labor market improves.
Besides the Fed’s action, huge foreign fund inflows propped up the local currency, with the Philippine stock market climbing back to 5,300 territory on net foreign buying of nearly P1 billion.
Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said monetary authorities were keeping an eye on foreign capital inflows in search of higher yield.
"Quantitative easing continues to depress interest rates in the US. Low as they are, interest rates may still be lower. So capital is like water, it will seek its own level," Guinigundo said.
He said any BSP action to stem the flow of hot money “depends on the seriousness or the magnitude of capital flows.”
“As we said earlier, we have macroprudential measures in place and depending on the magnitude of the flows, it will also define the kind of monetary action the central bank is taking," he said.
The macroprudential measures so far put in place by the central bank to address the issue of capital flows include ceilings on loans to real estate among other restrictions on lending, which the BSP can recalibrate as the need arises, Guinigundo said.
He said any BSP response would be anchored on how it sees inflation in terms of its mandate of keeping price stability.
Tweaking the exchange rate, therefore, is considered in terms of its impact on prices, he said, as a very volatile peso-dollar exchange rate will be disruptive to businesses.
"The peso has been quite stable since the beginning of the year, particularly in terms of the standard deviation," he said.
Guinigundo said monetary policy can also be used to manage the capital inflows, as cutting interest rates would turn away foreign funds seeking higher yields and keep huge inflows of capital at bay.
If the situation warrants it, the central bank may device new measures to address this problem, he said.
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