The Philippine peso has recently experienced notable depreciation against the United States (US) dollar, marking one of the most significant declines among emerging market currencies last week.

Last Friday, June 13, the peso closed at ₱56.21 per dollar, its weakest level since April 28, 2023, when it reached ₱56.42. Data from the Bankers Association of the Philippines highlighted that this drop was influenced by geopolitical tensions, specifically Israel's airstrikes targeting Iran’s nuclear program.

Analysts from Capital Economics indicated that the peso has been one of the worst-performing currencies in the emerging markets since June 6, with gains in the US dollar following concerns related to global risk prompts.

According to Jonas Goltermann, deputy chief markets economist at Capital Economics, the strikes in Israel have bolstered the dollar's recovery against various currencies, including the peso.

Despite the dollar's gains, which come during a period when it is seen at an over three-year low, analysts noted the 'safe-haven' qualities of the dollar remain strong during certain risk-off events.

MUFG Bank’s Asia FX report also recognized the US dollar's reinforcement from increased safe-haven demand, recognizing the negative impact on Asian currencies like the peso, South Korean won, and Indian rupee, attributed to their vulnerability to external risks and dependence on oil imports.

Notably, the Bangko Sentral ng Pilipinas (BSP) is poised to cut key interest rates on June 19, with economists projecting a reduction of 25 basis points.

Gareth Leather, a senior Asia economist at Capital Economics, expressed anticipation for this rate cut despite the peso's depreciation.

John Paolo Rivera, a senior research fellow at the Philippine Institute for Development Studies (PIDS), remarked that the peso's current position may not significantly alter the expected rate cut, although it could pose challenges for the Monetary Board ahead of its meeting.

Rivera indicated that while slowing inflation might facilitate a rate cut, a weaker peso could complicate decision-making, particularly concerning its impact on imported inflation and market sentiment.

The consumer price index recorded an inflation rate of 1.3% in May, the lowest in over five years.

He noted that if the peso's depreciation is perceived as a transient response to external events, the BSP might still enact a rate reduction, whereas prolonged weakness could prompt a reevaluation of their policy stance.

Further analyses by other economists align with expectations for a 25 basis point reduction this week.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC), stated that such a rate cut would aim to minimize interest differentials with the US dollar, potentially stabilizing the peso.

HSBC's ARIS Dacanay emphasized favorable inflation trends as critical to the BSP's decision-making process regarding reductions in borrowing costs.

In discussions around external economic pressures, Michael Wan, a senior currency analyst at MUFG Global Markets Research, addressed how rising oil prices could pressure oil-dependent currencies like the peso, though suggested that with manageable inflation and account balances, a continued upward trend in oil prices would be required to substantially alter Asian currency dynamics.

Moreover, economists at Chinabank Research noted that although the peso-dollar exchange rate has risen recently, it remains well below historical peaks, offering the BSP sufficient leeway to continue its rate-cutting strategy.

Since August of last year, the BSP has reduced key interest rates by a total of 100 basis points, decreasing the policy rate from 6.5% to the current rate of 5.5%.

A further cut would lower the policy rate to 5.25%.