The exchange rate between the US dollar (USD) and the Philippine peso (PHP) is influenced by a variety of factors, including the actions of central banks: the Federal Reserve (Fed) in the United States and the Bangko Sentral ng Pilipinas (BSP) in the Philippines.
Federal Reserve: When the Fed adjusts its benchmark interest rate, it influences the value of the USD. An increase in the Fed's interest rate can make USD-denominated assets more attractive, leading to an appreciation of the USD against other currencies, including the PHP.
Central banks monitor and control inflation through their monetary policy. High inflation can erode the value of a currency, leading to depreciation against other currencies. Conversely, low and stable inflation rates tend to support a currency's value.
Economic policies aimed at stimulating or cooling down the economy can also impact exchange rates. For example, policies that stimulate economic growth can increase investor confidence in that country’s assets, leading to an appreciation of its currency.
Although not always common, the BSP might engage in direct interventions in the foreign exchange market to stabilize or influence the value of the PHP. This can involve buying or selling the PHP against the USD to affect its exchange rate.
The actions and communications of central banks can significantly influence market sentiment. For example, if investors anticipate that the Fed will raise interest rates, the USD may appreciate in advance of the actual decision.
This involves the buying or selling of government securities to control the money supply. An increase in the money supply through quantitative easing can lead to a depreciation of the currency, while quantitative tightening can have the opposite effect.
Central banks play a crucial role in the determination of exchange rates through their monetary policy decisions, which can affect inflation, interest rates, and economic growth.