Peso weakens amid Red Sea tensions and hawkish ECB

The peso weakened against the dollar on Tuesday as market players flocked to the safe-haven currency amid heightened tensions in the Red Sea and hawkish signals from the European Central Bank (ECB).   

The local currency closed at PHP 55.83, six centavos weaker than a day earlier, data from the Bankers Association of the Philippines website showed.

The peso opened Tuesday’s session at PHP 55.85 a dollar, appreciated to as much as PHP 55.795 and weakened to as much as PHP 55.99 against the greenback. Dollars traded rose to USD 1.62 billion from USD 1.31 billion on Monday.

The peso weakened after strengthening for three straight trading days as tensions increased in the Middle East, Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said in a Viber message.

Attacks on ships in the Red Sea weighed on risk sentiment, as Houthi militants hit a US-owned container vessel with a missile in the Gulf of Aden, although the ship did not suffer significant damage. Iran also launched attacks against targets in Syria and Northern Iraq.

The peso also declined after hawkish comments from ECB officials, Mr. Ricafort said.

ECB Governing Council member Joachim Nagel has said it is too soon for market players to discuss policy rate cuts as inflation remained elevated. 

Robert Holzmann, another policy maker from the ECB, said no one should count on the ECB cutting rates at all this year given the conflict in the Red Sea, which could push up shipping costs through the Suez Canal.

The peso also weakened after government announcements that the strong El Niño episode could last until February, Mr. Ricafort said. 

In an advisory, the state weather agency said El Niño could persist through next month, advising government agencies and Filipinos to take precautionary measures to mitigate its impact. 

The Department of Agriculture has begun cluster meetings nationwide to discuss strategies on how to ease the impact of El Niño on rice output.

“The peso weakened amid potentially hawkish remarks on US policy from Fed official [Christopher J.] Waller tonight,” a trader said in an e-mail.

Markets are pricing in a 25-basis-point (bp) cut in March from the US Federal Reserve, which could be the first rate cut from the US Fed since it started hiking rates in March 2022. 

The Fed raised borrowing costs by 525 bps from March 2022 to July 2023, bringing the target Fed fund rate to 5.25-5.5%.

The trader expects the peso to continue weakening against the dollar on Wednesday as the market stays cautious before the release of China’s economic output report.

Mr. Ricafort expects the peso to move between PHP 55.75 and PHP 55.95 a dollar, while the trader sees it ranging from PHP 55.75 to PHP 56. — By Keisha B. Ta-asan, with Reuters