Factors affecting peso-dollar exchange rate

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peso-dollar exchange rate
There are generally factors affecting peso-dollar exchange rates. I listed down some factors so you will have an idea as to why peso-dollar exchange rates fluctuate. Image Credit: Pixabay

With all the politics and debate going on in this world, there are a lot of interests in the peso-dollar exchange rates. Things have been different for the past few years as we have seen the value of the dollar fluctuating.

For some, this forces them to cut back on their daily needs while others cut back on their travel and fun. Well, there isn’t much we can do about the pesos to dollars rate of exchange but understanding the reasons behind it, can relieve some frustrations.

There are generally factors affecting peso-dollar exchange rates. I listed down some factors so you will have an idea as to why peso-dollar exchange rates fluctuate.

1. US economy has been in downturn.
US and Japanese are the Philippines major export destinations.

The US government’s response to the economic woes is to pump more money into the economy, hoping that it will usher growth. Unfortunately, this move means they need to print more money which will affect the currency-that’s the law of supply and demand at work. More supply with high demand will affect the value of the dollar.

Slack business activity in these countries and lower consumption means that their businesses and consumers are buying less of our exports. When a country experience a recession, its interest rates are likely to drop, decreasing its chance to acquire foreign capital. And as a result, its currency weakens in comparison to that of other countries, lowering the exchange rate.

2. OFW remittances have been on general downtrend.
Reduction in remittances could be traced, in turn, to the economic slowdown in these labor-importing countries. This is why OFWs hold back converting their dollars into pesos in anticipation of a higher exchange rate, that is, in expectation of the further weakening of the peso.

3. Foreign exchange receipts declined.
Foreign exchange receipts from tourism have declined because of the unresolved series of kidnappings by the Abu Sayyaf.

4. Foreign investments coming in the Philippines have been affected by the debt crisis and political crisis.
Some foreign investments coming in the Philippines that is affected by debt crisis and political crises tend to lump together emerging markets. Thus, any indication of crisis in any of theses countries can result in the weakening or worse loss of the investor confidence elsewhere and higher risk premium on lending.

5. Inflation Rates.
Countries with lower inflation rates tend to see an appreciation in the value of its currency. The prices of goods and services rise at a slower rate where the inflation is low. Thus countries with consistently lower inflation rate exhibits an increasing currency value while countries with higher inflation typically see depreciation in its currency accompanied with growing interest rates.

6. Interest Rates.
Changes in interest rate can affect currency value and dollar exchange rate. The increase in interest rates causes a country’s currency to appreciate, since higher interest rates provide higher rates to lenders. Thus, this attracts more foreign capital which causes a rise in exchange rates.

7. Speculation.
The increase in demand will cause the value to rise. Thus, investors will demand more of that currency in order to make a profit in the near future. With this increase in currency, the value rise in the exchange rate as well.

8. Government interventions.
Some government attempt to influence the value of their currency, they sought to keep its currency undervalued to make their exports more competitive. They can do this by buying US dollar assets which causes to increase the value of the US dollar to Chinese Yuan.

Foreign exchange rate (ForEx rate) is one of the most important means through which a country’s level of economic health is determined. It provides a window to its economic stability that is why it is constantly watched and analyzed.

These factors determine the variations and fluctuations in exchange rates and explain the reason behind their instability. I hope you learn something from this article.