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Published 22.06.2023 08:04
© Reuters.
By Julio Sanchez Onofre
Investing.com – The price of the dollar in Mexico this Thursday, June 22, has witnessed an increase as the markets digest the remarks made by Jerome Powell, the president of the Federal Reserve (Fed), who has predicted further interest rate hikes to control inflation in the United States. This development sets the stage for the upcoming monetary policy decision by the Bank of Mexico (Banxico), which is scheduled to be announced later today.
As of 07:44 hours, Mexico City time, the exchange rate has depreciated by 0.2%, with the dollar settling at 17.15 units per dollar.
“The depreciation is attributed to the strengthening of the US dollar by 0.12%, based on the weighted index, due to the expectation that… On Wednesday, Jerome Powell, the Fed president, projected two 25 basis points (bp) interest rate hikes to curb inflationary pressures,” commented Gabriela Siller Pagaza, Director of Economic Analysis and Finance at Banco Base.
The markets are also reacting to the surprising move by Banxico, which, in its June meeting, decided to raise the interest rate by 50 bp, surpassing the market’s expectation of a 25 bp increase, bringing it to 5%.
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Given this scenario, it is anticipated that Banxico will maintain the interest rate at the current level of 11.25%. However, if the Fed continues to raise its benchmark rate while its Mexican counterpart keeps it unchanged or even initiates early cuts, the interest rate spread would narrow, making the Mexican currency less appealing.
“The strength of the peso, which has led to the exchange rate reaching a low of 17.0249 pesos per dollar, a level not seen since December 2015, is partly due to the interest rate differential between Mexico and the United States. In this context, the possibility of the Fed increasing the interest rate by 50 bp this year would diminish the attractiveness of the Mexican peso,” explained the specialist.
This morning, it was also announced that the inflation rate moderated at a higher rate than analysts had expected, settling at 0.02% in its monthly reading and 5.18% annually.
“With these inflation data and the recent announcements from the Fed, it is highly likely that Banxico will announce, during its monetary policy meeting today, that it will maintain the funding rate at 11.25% and intends to keep it unchanged for an extended period, while remaining open to possible adjustments if inflation permits,” said Jorge Gordillo Arias, Director of Economic and Stock Market Analysis at CIBanco.
The expert predicts that the exchange rate could fluctuate between 17.09 and 17.28 for the remainder of the day.
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In this content, it is reported that the price of the US dollar in Mexico has increased due to comments made by Jerome Powell, the president of the Federal Reserve, about further interest rate hikes to control inflation in the United States. This has prompted speculation about the upcoming monetary policy decision by the Bank of Mexico. The article also mentions that the US dollar has strengthened and that the exchange rate in Mexico has depreciated. The content includes a comment from the Director of Economic Analysis and Finance at Banco Base about the impact of these developments.
How may the increase in the price of the US dollar in Mexico affect the country’s economy?
The increase in the price of the US dollar in Mexico can have several effects on the country’s economy:
1. Exports: A higher value of the US dollar means that Mexican goods become more expensive for foreign buyers. This can lead to a decline in exports, as it becomes less competitive in the global market. This could negatively impact industries such as manufacturing and agriculture, which heavily rely on exports.
2. Imports: On the other hand, a stronger US dollar can make imports cheaper for Mexican consumers and businesses. This can lead to increased imports of foreign goods, which may have an adverse impact on local industries. It can also contribute to a trade deficit as more money flows out of the country for imports.
3. Inflation: A stronger US dollar can lead to higher inflation in Mexico. Since imports become more affordable, the cost of imported goods and raw materials for local businesses can rise, which ultimately trickles down to the consumers. This can erode purchasing power and negatively affect the living standards of people in Mexico.
4. Tourism and Remittances: A stronger US dollar can make traveling to Mexico more expensive for American tourists, potentially leading to a decline in tourism revenue. Additionally, many Mexicans rely on remittances from family members working in the United States. A higher exchange rate means that the value of these remittances in Mexican pesos decreases, impacting the income and spending power of households.
5. Investment: The increase in the price of the US dollar may affect foreign direct investment in Mexico. A stronger dollar can make investing in Mexico relatively more expensive for foreign investors, potentially reducing capital inflows.
Overall, the increase in the price of the US dollar in Mexico can have a complex impact on the country’s economy, potentially affecting exports, imports, inflation, tourism, remittances, and investment. The specific consequences depend on various factors such as the degree of economic integration, fiscal policies, and global economic conditions.
The Mexican Peso’s vulnerability is evident as it succumbs to market fluctuations triggered by Powell’s remarks, adding to the anticipation surrounding Banxico’s upcoming decision.
It seems like the Mexican Peso is caught in a twister between Powell’s comments and Banxico’s upcoming decision. Uncertainty in the markets is causing the currency to weaken. Will Banxico’s decision provide some stability, or will the storm continue?