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Posted by Lani Estepa on Monday, April 16th, 2007 at 8:31 pm
One of the modern-day paradoxes that we are encountering is the peso-OFW dollar connection. Last week, the peso hit a strong 47.94 to the dollar, a record for the past six years. Analysts attribute this to both the steady inflow of OFW remittances (so the government can’t claim credit for the stronger peso) and foreign portfolio investments. Some say the peso is getting stronger because the dollar is weakening worldwide. But that is beside the point. Now the paradox: as OFWs send more dollars home, the peso gets stronger, rendering their dollars weaker. Technically, this means that if OFWs want their dollars to buy more locally (Philippines), they should send less money. Huh? Yes, that’s the paradox. The peso’s surge is hurtful to the very people who are contributing to its strength because each peso decline in the ER means the OFW remittances’ purchasing power weakens.
If one analyzes the situation, it seems a vicious circle: because the purchasing power of the families of OFWs weaken (as the exchange rate decreases), their (OFWs) tendency is to send more to maintain the buying power of the money they send home. But the more they send home, the stronger the peso becomes. Such is the impact of the law of supply and demand on the foreign exchange market.
It’s a good thing the Bangko Sentral ng Pilipinas maintains a managed float policy, which means they cannot let the exchange rate go on a freefall. Monetary authorities will see to it that the exchange rate is “just about right” for OFWs, for the export sector, for the industries that spend much on imported inputs, and for our trade balances. They either buy or sell dollars to keep the exchange rate at equilibrium. Philippine-based dollar earners and dollar recipients of OFW remittances will just have to bear with periodic falls in their purchasing power, comforted by the fact that at least, each dollar they receive is x48 – on the average.
What if they convert their US dollars to Euro then convert it to peso if the need arises? Am I making any sense?
1 | Joy April 17th, 2007 at 1:29 amThat’s possible, but it’s useless. These currencies are all on a managed float and their exchange rates are determined by market forces worldwide. There’s little difference if you trade your dollars for euros and then from euros to pesos because the dollar is weakening against the euro as well. $1 = 0.738944 EUR and 0.738944 EUR = 47.7207 PHP. And $1 = 47.7120 PHP. You can find out for yourself how much you’ll get if you do this trade for any amount by visiting http://www.xe.com/ucc
2 | Lani April 17th, 2007 at 9:37 am