Peso hits new one-month low as Fed minutes spur recession fears

THE PESO dropped to a fresh over one-month low against the dollar on Thursday due to renewed recession fears following the release of minutes of the US Federal Reserve’s March meeting.

The local currency closed at PHP 55.26 versus the dollar on Thursday, depreciating by four centavos from its PHP 55.22 finish on Wednesday, data from the Bankers Association of the Philippines’ website showed.

This is the peso’s weakest close in over a month or since its PHP 55.32 finish on March 8.

The local unit opened Thursday’s session stronger at PHP 55.15 per dollar. It logged an intraday best of PHP 55.13, while its worst showing was at PHP 55.40 versus the greenback.

Dollars traded rose to USD 1.198 billion on Thursday from USD 935.98 million on Wednesday.

“The peso continued to weaken after the latest Fed minutes hinted at a likely mild US recession this year,” a trader said in an e-mail.

The peso was also dragged lower by bets of another 25-basis-point (bp) hike by the Fed despite slower consumer inflation in March, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message on Thursday.

Several Federal Reserve policy makers last month considered pausing interest rate increases after the failure of two regional banks and a forecast from Fed staff that banking sector stress would tip the economy into recession, Reuters reported.

But even they concluded high inflation remained so paramount they pressed on with a rate hike despite the risk.

After an unexpectedly complex debate that reshaped some policy views in real time, the dramatic developments after the March 10 failure of Silicon Valley Bank ultimately did little to derail the Fed’s rate-hike campaign, with officials convinced they could battle inflation with one set of tools and stabilize financial markets with others.

“Several participants … considered whether it would be appropriate to hold the target range steady at the meeting” to assess how financial sector developments might influence lending and the path of the economy, according to the minutes of the Federal Open Market Committee’s March 21-22 meeting, which were released on Wednesday.

Fed staff assessing the potential fallout of banking sector stress projected a “mild recession” starting later this year, with a recovery in 2024-2025, the minutes showed.

Even so, those several Fed policy makers who debated a pause ended up supporting the central bank’s quarter-percentage-point rate increase, agreeing along with other policy makers that actions taken by US financial regulators and the Fed had “helped calm conditions in the banking sector and lessen the near-term risks to economic activity and inflation,” the minutes said.

Inflation, meanwhile, “remained well above the Committee’s longer-run goal of 2%,” and Fed officials “concurred… that the recent data on inflation provided few signs that inflation pressures were abating at a pace sufficient to return inflation to 2% over time.”

The minutes showed a committee forced by the failures of Silicon Valley Bank and Signature Bank into an unexpectedly complex debate, but ultimately moving forward with higher interest rates.

Most Fed policy makers since the March meeting, with the notable exception of Chicago Fed President Austan Goolsbee and San Francisco Fed President Mary Daly, have concentrated their remarks on the need to bring down inflation rather than the risk of tightening credit conditions.

Meanwhile, the US consumer price index (CPI) climbed 0.1% last month after advancing 0.4% in February, data released on Wednesday showed.

In the 12 months through March, the CPI increased 5%, the smallest year on year gain since May 2021. The CPI rose 6% on a year on year basis in February.

For Friday, the peso could rebound against the dollar on the back of “potentially weaker US producer inflation report tonight,” the trader said.

The trader expects the peso to trade between PHP 55.05 and PHP 55.30 per dollar, while Mr. Ricafort sees it moving from PHP 55.15 to PHP 55.35. — By AMCS with Reuters