Fed Rate Hike Narrows Mexico's Interest-Rate Advantage

The Mexican peso weakened against the US dollar on Friday after the Federal Reserve's rate increase reduced Mexico's interest-rate advantage. The peso lost about 0.4% of its value, with the USD/MXN exchange rate rising to 17.2333 pesos per dollar from 17.1706 on Thursday.

The Fed raised its target range by 25 basis points to 3.75-4.00%, narrowing Mexico's policy-rate premium to 2.50 percentage points from 2.75 points. This reduction in the rate gap makes it less attractive for investors who borrow or hold dollars and earn peso interest.

Banco de México has kept its overnight target at 6.50% since May, including at its Aug. 6 meeting. The central bank's next policy announcement is scheduled for Sept. 24, which will be a key test of the peso's value. If Banco de México holds at 6.50%, the rate gap would remain at 2.50 points; a quarter-point cut would reduce it to 2.25 points.