The Monetary Board yesterday approved the relaxation of currency rules, raising banks’ forex trading limits to pre-Asian financial crisis levels, a move seen to temper the peso’s continuing strength.

Record inflows of remittances from overseas Filipino workers and strong portfolio investments have driven the peso up more than 10 percent against the US dollar since the end of 2005 and boosted liquidity in the banking sector.

The Bangko Sentral ng Pilipinas raised the amount of dollars banks can hold while it capped the amount they can sell to the public.

It also increased the amount of dollars local companies can invest abroad and the amount individuals can buy from banks.

The BSP imposed a "symmetrical" adjustment in both the banks’ overbought and oversold position to 20 percent of their unimpaired capital or an "absolute amount" of $50 million.

The amount of dollars companies can invest abroad without prior BSP approval was doubled to $12 million from $6 million.

Meanwhile, individuals can now buy up to $10,000 of foreign exchange, twice the earlier limit of $5,000 without presenting documentary requirements.

The new regulations take effect on April 2.

The new overbought limit is 10 times the original allowable $5 million. The new ratio to unimpaired capital, or capital without encumbrances, is eight times the earlier 2.5 percent.

There was no previous limit on the banks’ oversold or short position.

A similar cap of 20 percent of banks’ unimpaired capital or $50 million would be reimposed on their short foreign exchange positions.

Short-selling means that investors sell currencies, commodities or securities without owning them in the expectation they can buy them back at a lower price and make a profit.

The restoration of the short or oversold limit was meant to discourage excessive bank exposure to currency risks, the central bank said.

The $50 million cap is equivalent to 10 percent of the average daily turnover in the local foreign exchange market, BSP Gov. Amando Tetangco said.

Asian markets have been wary of changes in foreign exchange policy after the Bank of Thailand imposed capital controls in December to restrain the rise of the baht, only to partly reverse the measures when the move alarmed foreign investors.

The BSP said relaxing the country’s currency trading rules should be seen as a return to normal after the 1997-98 crisis, when the peso, like other Asian currencies, was dragged down.

The 20-20 percent overbought/oversold formula was the cap prevailing in the local market prior to the financial crisis and was in line with prevailing limits in the region.

For purposes of purchasing foreign exchange from banks, the BSP said outward investments will now include residents’ investments in foreign currency-denominated bonds issued by the national government and other Philippine entities.

On the individual dollar purchases, the BSP scrapped the "no-splitting" requirement; meaning, within the 15-day period, buyers can buy the dollars up to the prescribed limit in trenches.

The BSP also removed the notarization requirement for these transactions.

"The move is envisaged to make the regulatory environment more responsive to the needs of an expanding, more dynamic economy, which has increasingly become integrated with global markets," Tetangco said.

"Improving macroeconomic fundamentals, as well as ongoing banking, capital market and institutional reforms provide a favorable setting for the comprehensive review and gradual reform of the existing foreign exchange regulatory framework," Tetangco said.

Tetangco said imposing a cap on the banks’ dollar sales won’t dampen the peso, saying banks "have been making adjustments" in their dollar positions even prior to the issuance of the new foreign-exchange rules.

The peso has sustained its gains due to huge inflows from investments and remittances, as well as increase in exports.

Tetangco said the new regulations will "improve the overall economic and financial regulatory environment."

He said this would cause more forex inflows.

"The freer flow of capital confers direct benefits in terms of providing additional resources to the domestic economy and allowing diversification by Philippine entities," Tetangco said.

"It will also individuals and businesses with legitimate transactions to have greater access to foreign exchange," he said.