Background on the Mexican Economy and Currency
The Mexican peso has reached its highest level in 17 months, appreciating against the US dollar for the fourth consecutive day. This strengthening is driven by several factors, including a weakening US dollar, carry trade flows, and interest rate differentials between central banks.
Experts’ Perspectives
Alejandro Garza Salazar, Director of Investments at Aztlan Equity Management, attributes the peso’s appreciation to carry trade and the weakness of the US dollar. He explains that the relative interest rate differentials between Mexico and other countries, such as Japan or the United States, bolster the peso due to Mexico’s higher interest rates.
Gabriela Siller, Director of Analysis at Banco Base, also highlights the role of carry trade flows and the Federal Reserve’s more flexible monetary policy. The Fed began purchasing $40 billion worth of Treasury instruments monthly since December 12, increasing market liquidity without a predetermined duration. Additionally, there’s potential for further interest rate reductions in 2026.
Global Dollar Weakness
The US dollar is experiencing one of its worst years, with a near 10% decline in its global index. This weakness stems from a combination of economic, political, and seasonal factors.
The dollar index (DXY) from the Intercontinental Exchange, which measures the greenback against a basket of six reference currencies, fell 0.15% to 98.27 points on Tuesday. This marks its lowest level since October 6, when it closed at 98.11 points.
Year-to-date, the index has dropped 9.44%. Against major currencies, the dollar has lost ground in 2025. The euro appreciated by 11.92%, the Japanese yen advanced by 1.44%, the British pound gained 6.94%, the Canadian dollar rose by 4.26%, the Swiss franc increased by 12.28%, and the Swedish krona surged by 16.02%.
Analysts from GBM Research attribute the recent third rate cut by the Federal Reserve and Jerome Powell’s cautious tone to the pressure on the US dollar, which may remain weak in the short term unless there’s a significant increase in risk aversion.
Key Actions and Ideas
- The Mexican peso has appreciated by 0.30% against the US dollar, reaching its lowest level since July 22, 2024.
- Over the past year, the peso has gained 13.9% against the dollar.
- The peso’s appreciation is driven by carry trade flows, a weakening US dollar, and interest rate differentials between Mexico and other countries.
- The Federal Reserve’s flexible monetary policy, including monthly $40 billion Treasury instrument purchases and potential interest rate reductions in 2026, supports the peso’s strength.
- The US dollar is experiencing its worst year, with a near 10% decline in its global index due to economic, political, and seasonal factors.
Key Questions and Answers
- Q: What factors are driving the Mexican peso’s appreciation?
A: The peso’s appreciation is driven by carry trade flows, a weakening US dollar, and interest rate differentials between Mexico and other countries.
- Q: How has the US dollar performed in 2025?
A: The US dollar has had a challenging year, with a near 10% decline in its global index due to various economic, political, and seasonal factors.
- Q: What role does the Federal Reserve’s monetary policy play in the peso’s strength?
A: The Federal Reserve’s flexible monetary policy, including monthly $40 billion Treasury instrument purchases and potential interest rate reductions in 2026, supports the peso’s strength.
