Peso faces tests as Fed holds firm on rates

The Fed’s September decision to raise its benchmark rate by 25 basis points, to a target range of 3.75% to 4%, marked the first hike in more than three years and the first under Chair Kevin Warsh. Markets read the move as a clear signal that policymakers remain focused on bringing inflation back toward the 2% goal, even as growth and geopolitical risks mount. As a result, higher US yields continue to draw capital towards dollar assets and away from emerging-market currencies.

Fed shift meets a vulnerable peso

ANZ Research, led by Khoon Goh as head of Asia research, argues that this rate-hiking cycle tightens the screws most on Asian economies with wide current account deficits and limited participation in AI-linked export growth. In his latest note, Goh highlights the Philippines, Indonesia and India as the three economies most exposed to renewed currency pressure. They lag the AI-driven trade cycle and still face persistent trade imbalances.

These economies depend more on external financing to cover deficits. Higher US rates therefore raise funding costs and reduce the appeal of local bonds and equities. ANZ points out that the Philippine peso, Indonesian rupiah and Indian rupee are among Asia’s worst-performing currencies year to date, as elevated oil prices inflate import bills while tighter US financial conditions make it harder to attract portfolio inflows.

Recent local bank analysis echoes this view, noting that the peso has lost around 6% against the dollar this year, placing it at or near the bottom of the regional FX performance tables. One Manila-based strategist captures the mood bluntly: Philippine currency pressure now reflects global forces as much as domestic policy.

AI-driven surpluses widen the regional gap

By contrast, ANZ estimates that the broader Asian region has built a sizeable cushion from the AI trade boom. Current account data show a regional surplus of about US$1.4 trillion in the second quarter of 2026, roughly double the surplus recorded in the fourth quarter of 2024. Strong demand for AI-related products and deeper integration into semiconductor and advanced electronics supply chains drove that shift. According to ANZ, these AI-linked exports have strengthened external positions and helped support currencies in North Asia and selected ASEAN markets.

Goh notes that the benefits from AI have spread beyond electronics, with non-electronic exports also picking up across parts of Asia. This broadening trade impulse gives surplus economies greater resilience to higher US interest rates and elevated oil prices. Stronger export receipts offset costlier imports and reduce reliance on volatile portfolio flows. In addition, record or near-record remittance inflows into the Philippines have helped cushion the balance of payments. However, analysts warn they have not fully offset the impact of high energy costs and widening trade deficits on the peso.

What does the peso’s slide mean for investors?

The divergence is stark. While surplus economies anchor regional stability, the Philippines remains more exposed to swings in oil prices and Fed expectations. The peso has already weakened past the P62 level and, at times, moved towards P63 per US dollar as markets price in further Fed tightening and sustained geopolitical risks around energy supply. This has occurred even as the Bangko Sentral ng Pilipinas has raised its benchmark rate by a cumulative 75 basis points since April to 5%, aiming to bring inflation closer to its 3% target and to support the currency. Higher domestic rates have not fully offset the pull of the stronger dollar.

For investors, the mix of hawkish Fed guidance, record-low peso levels and uneven AI-driven trade gains presents a complex but tractable opportunity set. Philippine local-currency debt now offers higher nominal yields, yet carries more sensitivity to US rate expectations and energy shocks. Meanwhile, regional peers with stronger AI-linked surpluses may offer relative FX stability but less yield pick-up. Readers tracking broader Asian fixed income dynamics may also find the regional context explored in Asian fixed income powers the H2 2026 portfolio directly relevant.

As ANZ cautions, Asia’s central role in the global semiconductor supply chain also means that any pullback in AI spending would quickly feed through to exports and growth. Goh stresses that such a reversal remains a risk scenario rather than the base case, but the warning is clear: the same AI tailwind that now supports many Asian currencies could become a headwind if global investment slows. For now, investors should watch three signals closely — the Fed’s rate path under Warsh, the Brent oil price, and whether AI-related export momentum in Asia broadens further or begins to cool.

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