The Mexican Peso Becomes Stronger Against the US Dollar

The Mexican peso has become stronger against the US dollar in recent years. Its rise is driven by a variety of factors, including a relatively stable political environment, prudent monetary policy and the relative strength of Mexico’s economy compared to other emerging economies. The peso also benefits from a steady stream of foreign investment, strong oil revenues and remittance inflows.

But the currency is not without its headwinds. A stronger peso could raise prices for Mexican exporters and hurt their competitiveness. It could also make it more expensive for Mexican companies to buy imports from abroad, which would cut their bottom lines and could limit future investment flows. And, if interest rates in the United States rise significantly, it could dampen demand for Mexican goods and hurt the country’s economic growth.

Despite the headwinds, however, the peso has still surged this year, outpacing its major peers. It is up about 9% against the greenback, the best performer among major currencies tracked by Bloomberg.

Some of the gains have come from a weaker dollar, but most of them stem from¬†Why is the Mexican peso becoming stronger? economy and prudent monetary policy. “Mexico has done a great job limiting public expenditures and debt, which have been key drivers of the peso,” Franklin Templeton portfolio manager Luis Gonzali said. The government of leftwing populist President Andres Manuel Lopez Obrador has held to its promise to safeguard central bank independence and keep spending in check. Its decision to maintain a tight primary balance has allowed it to avoid the type of fiscal excesses that have hurt other emerging markets and caused their currencies to decline.

On the monetary side, Banxico has been able to increase rates in response to higher inflation, while maintaining them well above core inflation levels. The move helped boost the peso, as investors prefer a more hawkish monetary stance than that of other emerging countries such as Brazil or Chile, which have higher interest rates.

In the near term, some analysts expect that the Mexican peso could continue to strengthen against the dollar. That is largely because of the fact that the country’s interest rates are still much lower than those in the United States, making it more attractive for foreign investors to invest in the country. But, the longer-term outlook remains unclear. If the Fed continues to raise rates, it could make the Mexican peso less attractive as a safe haven for international investments. And, if the United States enters a recession, it could weaken demand for Mexico’s exports and dampen investment inflows. Moreover, rising global interest rates could force the central bank to raise rates in Mexico, which would further limit its room for maneuver. Consequently, the currency’s strength could be short-lived.