Central banks, such as the Federal Reserve (Fed) in the US and the Bangko Sentral ng Pilipinas (BSP) in the Philippines, set monetary policy, including interest rates. Changes in interest rates can affect the attractiveness of holding USD or PHP, thereby influencing the exchange rate.
Central banks can directly intervene in the foreign exchange market by buying or selling their own currency. If the BSP buys PHP and sells USD, it can increase the value of PHP relative to USD, and vice versa.
Central banks hold foreign reserves, including USD, to stabilize their currencies. Changes in the composition of these reserves can impact the exchange rate.
Central banks typically have an inflation target. If inflation is higher in the Philippines than in the US, the BSP may raise interest rates, which can lead to a stronger PHP relative to USD.
Central banks closely monitor economic data, such as GDP growth, employment figures, and trade balances. Stronger economic data in the Philippines relative to the US can lead to a stronger PHP.
Central banks' actions and statements can influence market expectations about future exchange rate movements. For example, if the Fed signals that it will raise interest rates, it can lead to a stronger USD.
Central banks also consider political and geopolitical developments that can affect exchange rates. For example, uncertainty or instability in the Philippines can lead to a weaker PHP.
Central banks take into account global economic conditions, such as economic growth in major economies and changes in global trade patterns, which can impact the exchange rate between USD and PHP.