© Reuters. FILE PHOTO: An illustration shows Mexican pesos and US dollars in Mexico City, March 10, 2015. REUTERS/Edgard Garrido/File Photo
Written by Noe Torres
MEXICO CITY (Reuters) – The Mexican peso has reached its highest value against the US dollar in seven years, as the president celebrates its strength but analysts warn of damaging side effects on exports and remittances.
The Mexican peso is among the best performing currencies this year as it gained 12% against the US dollar, after closing up around 5% last year.
The peso’s gains are expected to continue, as financial flows continue to enter the country by attracting higher yields, which have become more attractive as a result of the central bank’s interest rate hike.
But the recent strengthening of the Mexican currency to about 17 pesos to the US dollar, from 19.50 pesos to the dollar last December, is making Mexican exports more expensive.
“The prolonged appreciation of the super peso could be more harmful than helpful,” said Guillermo Mateos, an analyst at Banco Base, noting that it could slow exports as their prices rise.
In April, the value of exports decreased by 2.9% year on year.
The value of the peso also affects the competitiveness of Mexico’s large industrial sector, with unions warning that competition with Asian products is getting tougher as the peso rises since imports are relatively cheaper.
Remittances are also affected, as a weaker dollar translates into fewer pesos to convert, particularly in an environment of rising inflation.
In fact, Banco Base sees remittances losing more than 10% of their purchasing power if the peso-dollar exchange rate remains constant.
President Andrés Manuel López Obrador has repeatedly pointed to the peso’s gains — which he does not control — as an indirect sign of his administration’s austere budget policies. But the populist leader rarely acknowledges the downside of a stronger domestic currency.
“They’re already talking about the Mexican miracle, the Mexican dream,” he said at a recent news conference, referring to the peso’s ongoing winning streak.
Tourism could also suffer, said Jonathan Zuluaga, a Columbus de Mexico analyst, because the exchange rate hurts travelers, who will also get fewer pesos than before.
The Mexican peso has been among the most liquid currencies in the world since the country adopted a floating exchange rate in 1994.
Bets on the peso have grown stronger on the Chicago Mercantile Exchange since March. Last week, positions in favor of the currency rose to 78,809 contracts, one of the highest levels since 2020.
Analysts surveyed by Citibanamex see a similar trend, as they expect the peso to rise to 18.32 pesos to the dollar, from 18.70 pesos, by the end of this year.