In a significant shift, the Mexican peso has depreciated nearly 10% against the US dollar within just seven weeks, impacting many citizens as daily expenses may rise. On Thursday, the closing exchange rate stood at 18.71 pesos per dollar, marking a notable decline from the strong rate of 16.89 seen on September 4. This decline poses challenges for families and businesses alike, as a weaker peso can lead to increased costs for imported goods.
The recent depreciation is largely attributed to the U.S. Federal Reserve’s decision to raise interest rates, which has diminished the advantage of holding pesos over dollars. The current key interest rate in the United States is between 3.75% to 4%, while the Bank of Mexico maintains a rate of 6.5%. This narrowing of the interest rate gap has weakened interest in so-called “carry trades,” which involve borrowing in low-yield currencies to invest in higher-yield assets.
This week’s fluctuations in the currency also reflect broader global uncertainties, including heightened risk aversion due to ongoing international conflicts and concerns surrounding the USMCA trade agreement. On Thursday, the peso experienced a modest decline of 0.2% compared to Wednesday’s close, adding to a cumulative drop of 1.1% for the week.
Further complicating matters, Mexico’s national statistics agency INEGI recently reported an increase in the country’s inflation rate to 3.62% for the first half of October, up from 3.45% in September. Initially, this news caused the peso to rise slightly, but it ultimately closed weaker than it had earlier in the day.
As we look ahead, analysts predict that the Bank of Mexico will likely keep its key interest rate unchanged in upcoming meetings, despite potential increases in U.S. rates expected later this year. This situation raises concerns that the gap between interest rates could continue to narrow, exerting further downward pressure on the peso.
Opinions vary on where the peso will land by the end of the year. Analysts from various financial institutions estimate that the exchange rate could settle around 18.20 pesos per dollar, with projections ranging from 16.80 to 18.90. Understanding these dynamics will be crucial for everyday citizens as they navigate the financial landscape in the coming months.