Peso slips on inflation fears as oil prices soar

The peso weakened against the dollar on Thursday on heightened inflation fears after global crude oil prices breached USD 100 per barrel.

The currency declined by 2.2 centavos to close at PHP 62.535 versus the greenback from PHP 62.513 on Wednesday, data from the Bankers Association of the Philippines’ website showed.

The local unit opened Thursday’s session slightly stronger at PHP 62.50 per dollar, which was also its intraday best. Meanwhile, its worst showing was at PHP 62.58 against the greenback.

Dollars traded dropped to USD 1.189 billion from USD 1.681 billion.

“The peso weakened after crude oil price reached the USD 100-per-barrel mark following the renewed escalation of tensions in the Middle East. This development fueled domestic inflationary concerns and could prompt further safe-haven demand for the greenback,” a trader said in a Viber message.

The peso was also dragged by elevated US Treasury yields following the lower-than-expected bond buyback plan of the US Treasury, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

For Friday, the trader said the peso could move between PHP 62.40 and PHP 62.65 against the dollar, while Mr. Ricafort expects it to range from PHP 62.45 to PHP 62.65.

Currency markets treaded water on Thursday as investors weighed a fresh surge in oil prices and global bond yields, while the dollar found little support ahead of inflation readings that could shape the US Federal Reserve’s policy outlook, Reuters reported.

Brent crude futures remained firmly above USD 100 a barrel after breaching the level on Wednesday, as Iran and the US engaged in the biggest wave of attacks on shipping by both sides since the start of the war, threatening to worsen the disruption of energy supplies from the Middle East.

Fresh energy-induced inflation pressure sent global bond yields back on an upward trajectory, with benchmark 10-year Treasury yields hitting their highest levels since 2023 as a buyback program of longer-dated bonds also disappointed.

The greenback, however, found only marginal relief, easing against major peers after an earlier move higher. The euro and sterling both edged up, last at USD 1.1639 and USD 1.3555, respectively.

The yen also stood tall near a seven-month high, up roughly 0.1% at 153.35 ahead of an expected Bank of Japan rate hike next week.

The dollar index, which measures the greenback against a basket of currencies, gave up earlier gains and eased to 98.73.

“There’s a dynamic there where ultimately, safe-haven hedge policy is a dollar. It would be expected to have traded firmer, but it hasn’t happened,” said Richard Franulovich, head FX strategy at Westpac Institutional Bank.

He added that markets were becoming less twitchy to oil shocks as the war dragged on, while debasement trades, global central bank tightening and a more interventionist Treasury Department were all drags on the dollar “washing through in the background.”

The European Central Bank looks set to raise interest rates on Thursday for the second time this year, and is expected to signal that it is ready to tighten further if the inflation outlook does not improve.

Meanwhile the Bank of Japan is also expected to hike interest rates to 1.25% on Sept. 18 and then to 1.75% in the second quarter of 2027 as earlier than previously thought amid persistent concerns over broadening price pressures and yen weakness.

Market focus will turn to US inflation readings, including producer prices later on Thursday, and consumer price index on Friday, the last set of key data releases ahead of the Federal Open Market Committee meeting on Sept. 15 to 16.

Traders are now pricing a roughly 60% chance of a Federal Reserve rate hike this month after Friday’s stronger-than-expected nonfarm payrolls report.

“While higher inflation may warrant tighter policy, additional rate hikes would also increase government borrowing costs at a time when fiscal deficits and debt servicing burdens are already under scrutiny,” said Lloyd Chan, senior currency analyst at MUFG. — A.M.C. Sy with Reuters