SINGAPORE (UPDATE) - The Philippine peso suffered its biggest one-day loss in more than 7 months on Friday as dollar demand from local importers caused investors to cover short positions in the greenback amid renewed expectations of a U.S. monetary policy shift and a weaker yen.
The peso ended the day down 0.6 percent at 41.12 per dollar but off early lows. It was the currency's heftiest percentage loss since late September 2012, according to Thomson Reuters data.
"It was a short squeeze, coupled with oil demand," said one trader in Manila, referring to heavy dollar-short covering.
"That was because the dollar is so strong across the region."
The dollar rose against Asian currencies as a slide in U.S. claims for jobless aid renewed expectations that the Federal Reserve may reduce the $85 billion a month of bonds it now buys.
"The peso may test 41.30 once again next week, especially if U.S. data continues to show improvement," another senior Philippine bank trader said.
In the last two weeks, sentiment had turned sharply bullish on the peso, a Reuters poll showed late on Thursday, after Standard & Poor's upgraded the country's credit rating to investment grade on May 2.
Investors have added to bullish peso positions on remittance inflows despite caution over the central bank's measures to stem the peso's strength, which contributed to its slide on Friday, traders said.
Bangko Sentral ng Pilipinas has not only been spotted buying dollars for interventions but has repeatedly cut yields on peso deposits in order to curb the peso's appreciation.
"Dollar/peso can still move higher with corporate demand coming in until next week," said a foreign bank trader.
"Although 41.20 to 41.35 should be good levels to sell dollar, a break of 41.45 would signal a further rise," he added.