Coping with strong peso and weak dollar
June 26, 2007
With the Philippine Peso continuing to gain against the dollar, Overseas Filipino Workers (OFWs) seem to be at a disadvantage because their dollar earnings now are worth less than before. The question, then: What can an OFW do to cushion the effect of a decreasing dollar rate on the income of his family?
The response from Citibank after the jump.
Answer: Although the strengthening peso is good news to most, it isn’t that good for overseas Filipino workers (OFWs) since US dollar earnings aren’t worth as much as before in Philippine pesos. A few years ago, one US dollar was worth as much as P56. Now it’s hovering at P46.
With market forecasts that the peso will continue to appreciate against the US dollar, it would appear that families still holding foreign currency funds from previous remittances should exchange them to reduce their exposure.
One option is to explore a “forwards” arrangement with a bank. “Forwards” will allow OFWs and their families to lock in the exchange rate for a future conversion. Inquire from banks regarding policies for foreign exchange transactions and foreign currency accounts.
But aside from this, there is really nothing much that can be done to mitigate the effect of the strengthening peso, or to put it in the proper perspective, a weakening dollar, since an OFWâ€™s cash flow comes from his foreign earnings.
But if the cash flows come from investments, then the OFW can do something to achieve higher returns on dollar investments â€” he can move his placement to another kind of investment that may give higher interest income. Gone will be the days that a five percent per annum return on US treasury bonds will suffice. For 2007, the peso has already appreciated by about six percent absolute. One’s USD investment should thus be earning about 14 percent to 15 percent per annum to offset the effect of the depreciating dollar and still make money in peso terms.
Other options are dollar global equity funds, global balanced funds, global high yield bond funds, and alternative asset classes such as commodity funds and real estate investment trusts (REITs). These investments may potentially yield a high interest income per annum. But since these investments come with risks, the OFW should determine first if he can handle the risks. Check too, if these investments are easily available and accessible to the OFW and/or his family.
This trend of peso appreciation (or dollar depreciation) may continue for some time. This will be due to the economic expectations on both local and global economies.But that doesn’t mean one should hoard pesos. In the end, investors should look beyond currencies when making investment decisions as such short-term advantages cancel out in the long-term.
- Excerpts from Citibank’s Take Charge of your Money series published on the Philippine Daily Inquirer
See also: How to deal with a falling dollar
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