By Luisa Maria Jacinta C. Jocson, Reporter

THE PESO could continue to see volatility in 2025 amid uncertainties over the policy direction of US President-elect Donald J. Trump’s administration and its potential impact on inflation and global interest rates.

The local unit closed at P57.845 versus the dollar on Friday, the last trading day of 2024, strengthening by 12.5 centavos from its P57.97 finish against the greenback on Thursday.

This was the peso’s best close in three weeks or since it ended at P57.735 on Dec. 6.

Week on week, it jumped by 96.5 centavos from its P58.81-a-dollar finish on Dec. 20.

However, year on year, the peso weakened by P2.475 or 4.28% from its end-2023 finish of P55.37 versus the greenback.

In 2024, the peso closed at its record low of P59 thrice (on Nov. 21, Nov. 26, and Dec. 19.) as the dollar surged on bets of slower rate cuts by the US Federal Reserve amid inflation concerns. It has yet to breach this all-time low, which was first set in October 2022.

Even with its slight loss on Friday, the US dollar was headed for an almost 7% annual gain, as traders anticipated robust US growth, as well as tax cuts, tariffs and deregulation by the incoming administration of Mr. Trump, would make the Federal Reserve cautious on rate cutting well into 2025, Reuters reported.

The peso’s depreciation this year was due to the “combined impact of global and domestic factors,” Philippine Institute for Development Studies Senior Research Fellow John Paolo R. Rivera said.

The dollar was supported by the Fed’s hawkish stance, he said. The US central bank began its easing cycle in September with an outsized 50-basis-point (bp) cut and followed it up with 25-bp reductions at each of its November and December meetings, bringing the fed funds rate to 4.25%-4.5%, with Fed Chair Jerome H. Powell signaling cautiousness about that future cuts due to elevated inflation.

“This created downward pressure on the peso as investors favored dollar-denominated assets over peso,” Mr. Rivera said.

The peso’s weakening in 2024 was largely in line with other currencies due to the dollar’s surge following Mr. Trump’s US presidential election win.

“The stronger US dollar versus global currencies in recent months was largely due to the Trump factor that could lead to more protectionist policies that could, in turn, lead to fewer Fed rate cuts,” he said.

“The Philippines also continued to post a current account deficit, driven by elevated import bills and a slower-than-expected recovery in exports,” Mr. Rivera added. “While OFWs’ (overseas Filipino workers) remittances remained resilient, they were insufficient to offset the imbalance.”

Geopolitical concerns also drove safe-haven demand for the greenback, he said.

“Persistent geopolitical tensions, including the aftermath of the conflict in Ukraine and concerns over China’s economic slowdown, also contributed to global risk aversion, strengthening the dollar further.”

Domestic inflation conditions and the Bangko Sentral ng Pilipinas’ (BSP) own rate-cutting cycle also affected the peso’s movement against the dollar, Mr. Rivera said.

“For 2024, inflation remained a threat, limiting the BSP’s ability to aggressively cut interest rates. As the BSP moved cautiously with its easing cycle, the interest rate differential widened, adding pressure on the peso,” he said.

In August, the BSP delivered its first rate cut since 2020, slashing benchmark borrowing costs by 25 bps. It made two more 25-bp reductions at its October and December meetings for cumulative cuts worth 75 bps that brought the policy rate to 5.75%.

BSP Governor Eli M. Remolona, Jr. earlier said they are watching the peso closely and have been a bit more active in the markets than usual, intervening in small amounts in the past months amid the stronger dollar.

2025 OUTLOOKAnalysts said the peso’s weakness against the greenback could persist in 2025.

Jonathan L. Ravelas, senior adviser at professional service firm Reyes Tacandong & Co., said volatility is seen to “reign in 2025 amid Trump 2.0.”

“If the Fed begins cutting interest rates as expected by mid-2025, the US dollar could weaken, providing some relief for the peso. However, the pace and timing of these rate cuts will be critical,” Mr. Rivera said.

“Expected Fed rate cuts for 2025 could potentially lead to some healthy downward correction in the US dollar, based on Fed rate cycles,” Mr. Ricafort said.

Mr. Powell said earlier this month that US central bank officials “are going to be cautious about further cuts” after an as-expected quarter-point rate reduction, Reuters reported.

Traders are pricing in 37 basis points of US rate cuts in 2025, with no reduction fully priced into money markets until May.

The BSP’s “ability to balance its easing cycle with inflation risks and external pressures will play a major role” in the peso’s movement against the dollar in the coming months, Mr. Rivera added.

“Faster rate cuts without considering global trends could exacerbate peso weakness.”

Mr. Remolona has signaled further easing in 2025 but noted that delivering 100 bps worth of rate cuts might be “too much.”

The central bank will likely keep reducing rates in “baby steps” as it is still carefully monitoring upside risks to inflation, the BSP chief added.

“We expect the depreciation to get worse if the government does not implement the right policies,” Leonardo A. Lanzona, an economics professor at the Ateneo de Manila University, said.

Mr. Lanzona noted that the country’s “continued dependence… on imports has increased the value of the foreign currency to increase.”

“This raises the foreign exchange rate which in turn induces the rise of inflation expectations, thereby reinforcing the depreciation,” he added.

Mr. Rivera said the peso could trade at the P57 to P59 range in the first half of 2025.

“(There is) potential for recovery in the latter half if global monetary conditions ease and the Philippine economy shows resilience. We need to be watchful of the Fed’s monetary policy decisions, the BSP’s moves, and progress on trade and investment reforms.” — with Reuters