Philippine Peso Drops Most in 4 Years on Capital Outflow Concern

May 23 (Bloomberg) -- The Philippine peso dropped the most since March 2009 on speculation an improving U.S. economy will prompt the Federal Reserve to reduce asset purchases that have spurred fund flows into emerging markets. Bonds and stocks fell.

The Dollar Index, which tracks the greenback against currencies of six U.S. trading partners, touched the highest in almost three years after Fed Chairman Ben S. Bernanke said yesterday the central bank may taper monthly bond buying if it’s confident of sustained economic gains. Philippine gross domestic product probably expanded close to 6 percent in the first quarter, International Monetary Fund Resident Representative Shanaka Peiris said on May 21.

“A recovering U.S. economy and prospects of the Fed starting to tighten raise the possibility of some of the funds moving out of emerging markets like the Philippines,” said Rolando Avante, president of Philippine Business Bank in Manila. “The fundamental strength of the peso, supported by growth prospects and remittances, will keep the exchange rate in a range in the meantime.”

The peso dropped 1.2 percent to 41.69 per dollar at the close in Manila, according to Tullett Prebon Plc. The local currency traded at the lowest since Oct. 2. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 11 basis points to 4.55 percent.

U.S. retail sales unexpectedly advanced in April and jobless claims dropped to the lowest level since January 2008, according to data released this month.

Bonds, Stocks

The yield on the 8 percent notes due July 2031 rose 13 basis points, or 0.13 percentage point, to 3.85 percent, the highest since April 29, according to Tradition Financial Services. The Philippine Stock Exchange Index declined 1 percent, halting two days of gains.

The peso may rise to 37.50 per dollar in 12 months, said Mark Tan, a Singapore-based economist at Goldman Sachs Group Inc. in a briefing in Manila today. Inflation pressures may increase in the second half and may prompt the central bank to raise the benchmark interest rate in the fourth quarter, he said.

Bangko Sentral ng Pilipinas, in a memo dated May 17 posted on its website this week, said it will limit access to its special deposit accounts by banning certain types of funds held by trust entities. The central bank reduced the interest rate on $45 billion in special accounts three times this year to 2 percent while keeping its benchmark overnight rate at a record low 3.5 percent.

“The central bank’s actions are also geared towards supporting growth by prompting these funds to go back to the banking system and for the banks to lend,” Avante said.

To contact the reporter on this story: Clarissa Batino in Manila at cbatino@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net