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What happens when the peso weakens?


When the peso weakens versus other currencies, in particular the US dollar, it usually gets a lot of attention even from people who usually only use pesos in their transactions.


But even if you’re someone who doesn’t usually deal with money from other countries, there’s a chance that you’ll still be affected indirectly by a weaker peso. That’s why it would be good for you to know what exactly is happening and what it could mean for you.


Possible causes

The strength of a currency usually refers to its value relative to other currencies. So, the peso is said to be weakening against the dollar if you would need more pesos to exchange for 1 dollar.


This could happen for several reasons, including the dollar gaining strength, the peso losing ground, and both. Remember that when a currency gets stronger, it usually isn’t just against one other currency but versus many others.


Exchange rates and the strength of one currency strength changes according to market conditions, and they can change quickly. Negative events can cause big changes or volatility over time, and there isn’t any guarantee that the old exchange rate will return even when the event is finished.


Some export-oriented countries actually prefer a more-depreciated local currency. That’s because this can make local production more cost-effective and therefore attractive to foreign buyers.


Currency strength is sometimes also used to refer to the buying power of a currency, or how much goods and services you can get with it.


Potential effects

When a currency weakens, the ones who are affected the most are those who need to pay in the stronger currency. Examples of these are companies in the Philippines which import raw materials and those which have loans denominated in US dollar end up spending more when the peso weakens against the US dollar.


Depending on how much the peso has weakened, they may have to pay significantly more than they expected. In this situation, consumers are the ones who are often affected the most, since the higher costs could be passed partially or fully onto them in the form of higher prices.


The type and amount of items that are imported or otherwise paid for in US dollars is very big, and so the effects of a weaker peso can often be felt across different industries.


This doesn’t mean, however, that nobody benefits from a weaker peso. If you’re earning in or otherwise receiving US dollars (like through remittances), you’ll be able to exchange that money for more pesos than you would before.


The same is true if you export products to other countries and receive payment in US dollars.

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