Unusual Stability in Peso-Dollar Exchange Rate
Over the past three months, we have observed an uncommon behavior in the peso-dollar exchange rate – an unexpected stability amidst multiple signs of uncertainty in the markets. Since the start of the trade war, it was anticipated that its initial consequences would be seen in stock markets and subsequently in foreign currency exchange rates against the dollar. We witnessed these early effects during the trade war’s first month, yet until now, the Mexican peso has not devalued and remained stable. Similarly, other international currencies have shown appreciation against the US dollar.
Reasons for Foreign Currency Gains
- Decreased Demand for US Dollars: The drastic, ongoing, and erratic increase in tariffs has led economic agents to avoid strong trade commitments as much as possible due to high uncertainty. In scenarios of high trade uncertainty, it’s expected that trade will contract to avoid losses from high tariff costs or other border measures. This fall in demand for dollars is causing a similar trend, leading to the appreciation of other currencies, including the peso.
- Pressure on the Federal Reserve: There’s pressure on the US Federal Reserve to lower interest rates, causing capital flight to economies with more attractive interest rates, like Mexico. Placing capital in other markets results in decreased dollar demand, especially since many capital flows are currently very interested in investing in productive projects or portfolios based on euros, yen, pounds, renminbi, and even Mexican pesos.
Impact of Trade War on the US Dollar
These two phenomena combined have caused foreign currencies to regain ground in international markets. The dollar’s loss of value is a clear consequence of the trade war and the resulting international market instability. The current US administration’s trade war results have not met expectations, with trade flows not significantly increasing in favor of the US economy. Prices are rising, and the dollar’s value is declining.
If the trade war persists, it’s highly likely that the US dollar will continue to lose ground against other major global currencies.
Key Questions and Answers
- Q: Why is the peso stable despite trade war uncertainty? A: The Mexican peso’s stability is due to decreased demand for US dollars in international trade and capital flight to Mexico, which has more attractive interest rates.
- Q: How are other currencies appreciating against the dollar? A: Other currencies are gaining ground because of decreased dollar demand and capital flight to economies with more attractive interest rates, as well as direct investment in projects and portfolios based on these currencies.
- Q: What are the potential long-term effects of this situation on the US dollar? A: If the trade war continues, the US dollar is likely to lose more value against other major global currencies.
*The author is the Vice Dean of the School of Economic and Business Sciences at the Universidad Panamericana.
