ASIAN currencies will likely strengthen against the greenback as the United States Federal Reserve signals a possible rate cut next month, providing a supportive environment for policymakers considering a strategy change in monetary policy.
“With Fed rate cuts now seeming imminent, Asian currencies have finally snapped back into line with the narrowed yield gap since the start of the month,” Capital Economics economist Shivaan Tandon said.
“We expect Asian currencies to strengthen a bit further against the US dollar, providing a reassuring backdrop as policymakers consider the case for a change, of course,” he added.
Federal Reserve Chairman Jerome Powell on Friday said that the US central bank could start cutting rates next month, adding that “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Most economists are forecasting a 50-basis-point (bps) rate cut by the Fed this year, which could lead to a weaker dollar.
Tandon noted that this situation might make it easier for central banks in the region to consider changing their policies.
He pointed out that Asian central banks kept a cautious stance earlier this year due to concerns about rising import prices from currency weakness, even as inflation fell within target ranges and other emerging markets started easing.
In the case of the Philippines, the Bangko Sentral ng Pilipinas (BSP) policymaking body Monetary Board has already slashed the key policy rate by 25 bps, bringing down the rates to 6.25 percent from a 17-year high of 6.5 percent.
Tandon said that the BSP could still implement another 25 bps cut in the fourth quarter. The central bank has two meetings left scheduled in October and December.
Rizal Commercial Banking Corp. chief economist Michael Ricafort, meanwhile, argued that the Philippine central bank could also match any future Fed rate cuts, so that “healthy interest differential would eventually be maintained to help support the peso exchange rate, import prices, and overall inflation.”
The Philippine peso continued to strengthen against the dollar last week, closing at P56.333, its strongest level since April 3, 2024, when it was at P56.30:$1.
The peso hovered at P58:$1 for over two months, influenced by dovish statements from the BSP suggesting potential rate cuts ahead of the Fed, despite the peso’s weakening.
However, following a recent 25-bps rate cut, the peso’s performance has improved, moving closer to the P55:$1 level.
Ricafort said that a “further cut in local policy rates is possible if the peso exchange rate is relatively stable or stronger.”
BSP Governor Eli Remolona Jr. has indicated that the central bank could make another rate cut this year, as they expect inflation to stay comfortably within the 2.0 to 4.0 percent target range.
