If we were to review one of the highlights of the economy in 2018, other than the debilitating effects of high inflation — which should now be winding down — it is the continuing fall of the peso relative to the dollar. While a certain degree in the fall is attributable to inflation or its weakened purchasing power, when arrayed against the dollar, relative values can hardly be a product of domestic forces.

Let’s try to understand how American regulators affect the value of the peso given that very recently, in its final meeting for the year on key policy rates, the Fed increased interest rates while the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) elected to keep our interest rates where they currently are.

The United States Federal Reserve (the Fed) is the equivalent of the BSP’s Monetary Board where it is the primary regulatory authority for American banks and financial institutions. As both a regulator and the foremost economic policy-making body in a free market economy, it has the most influence in crafting US macroeconomic policies.

The Fed meets regularly. In those meetings, one of the most anticipated topics that the American public anxiously awaits is the matter of interest rates. So, termed as policy rates, they not only have systemic impacts on the rates charged on debt and those paid on deposit liabilities, but also because these are critical determinants of an economy’s currency.

While the value of a currency results from a number of other factors, one of the most important is the interest rates determined during those meetings. There indeed are other determinants however. One is the volume of trade between the American economy and a trading partner, such as the Philippines, including the balance of payments that result from that relationship, the debts incurred in the trade when an imbalance occurs and others, each coming together to create values based on the bilateral exchange.

There are other determinants. Note how the law of supply and demand influences the value of the peso during an election year and on Christmas when money supply increases should the mint print out more and the resulting supply circulates to fund the forthcoming campaign.

Election periods witness a rise in inflation where the peso falls as its supply increases.

Most of these determinants are locally confined. This is not the case with the US dollar.

The Fed met recently amid the high spikes in capital inflows from markets such as ours. Since the Trump presidency took office, American inbound foreign direct investments increased, manufacturing churned back on and domestic employment ramped up exponentially. These underlie and preempt interest rate deliberations that found the dollar’s value.

In considering rate policies, the Fed looks at several economic indices that indicate domestic capacities to absorb increased rates. Among the bellwether indices are productivity, employment and the manufacturing index. All three increased significantly in 2018 under Trump.

When these economic indices are in a chorus, the music produced is a song of praise as investments flow in or return home and Americans troop to work in troves and their jobs, specifically in the manufacturing sector, producing unprecedented growth.

These conditions compel the Fed to raise rates before the year ends regardless of further adjustments. The recent rate hike by the Fed this December will eventually push the peso lower despite our Herculean efforts to control inflation. Elliot Wave forecasters see it weakening further in the medium term.

These do not augur well for the Filipino public, courtesy of a corruption-ridden House apparently hell-bent on binge-feeding on illegal pork at the pigsty’s trough in order to fatten themselves in time for the 2019 midterm elections. At that time political campaign spending is likely to push up inflation, reduce the purchasing power of the peso and aggravate the inequity between the peso and dollar. Then, it won’t be the Fed versus the peso. It will be politicos versus us.