Peso Hits 1-Year Low as Dollar Strengthens in Mexico

The U.S. dollar surged to about MX$18.25 in early trading on Monday, marking the peso's weakest level in nearly a year. This small gain of about half a percent adds to a sharp reversal from early September, when the peso traded steadily below 17 per dollar. Over the month, the peso lost nearly 6% of its value, the worst performance among major currencies, briefly hitting 18.43 on October 1.

The main driver behind this shift is the narrowing interest rate gap between the U.S. and Mexico. On September 16, the U.S. Federal Reserve raised its benchmark rate to a range of 3.75% to 4%, while Mexico’s central bank, Banxico, held its rate at 6.50% on September 24. This left the spread at 2.5 percentage points, the narrowest since Banxico adopted its current policy tool. The shrinking gap reduces the incentive for investors to hold pesos, as the reward for the carry trade diminishes.

Banxico’s statement also influenced traders, as it dropped previous language about keeping rates steady. Future moves will now depend on inflation, the peso’s effect on consumer prices, and economic slack. Mexican inflation rose to 3.42% in early September, driven by higher prices for tomatoes, onions, and alcoholic beverages. Core inflation eased to 3.79%.

Global factors are also playing a role. The yield on the 10-year U.S. Treasury note topped 5% in mid-September, its highest level since 2007. Trade uncertainties, particularly the lack of renewal for the USMCA trade pact and ongoing talks with Mexico over autos, steel, and aluminum, add to the peso’s volatility. Some analysts predict the peso could move past 18.50 per dollar, depending on Treasury yields and geopolitical tensions.

For visitors and residents paid in dollars, a weaker peso means more purchasing power on the Peninsula. However, imported goods are likely to become more expensive over time. Banxico is closely monitoring this pass-through effect on local prices. Year-end expectations among analysts remain near 17.60 per dollar, with Mexico’s Finance Ministry projecting 17.80 for this year.