By Noé Torres and Rodrigo Campos
MEXICO CITY/NEW YORK (Reuters) – The Mexican peso touched its weakest level against the U.S. dollar in nearly two years before paring much of its losses as concerns that the U.S. economy could be headed for recession deepened and the peso’s recent weakness as a popular global trade wave recedes.
The Mexican currency was trading at 19.37 pesos to the dollar, down about 1.1% from Friday’s close. The peso’s overnight decline in offshore operations was about 4.4%, when the currency crossed the psychological barrier of 20 pesos to the dollar, a level not seen since October 2022.
The peso has been dragged down by a wave of sell-offs in global markets, particularly in Asia. The Japanese yen rose to a seven-month high against the dollar as traders unwinded their “carry trade” positions, a factor that had supported the peso’s strength until recently.
The trade involves financing in low-interest currencies such as the yen while investing in higher-yielding currencies such as the peso, to profit from the yield differential.
“As in any domino effect where there is panic, everything moves towards safe assets and leaves assets that are considered risky, such as the Mexican peso,” said Gabriela Seller, director of analysis at local firm Banco Biz.
The Mexican currency fell about 1% on Monday, adding to its 4% losses against the dollar since Wednesday’s close. The selloff was triggered by data Thursday showing U.S. manufacturing activity fell to its lowest level in eight months.
“There is simply too much uncertainty on both the U.S. and Mexican sides,” Commerzbank currency strategist Michael Pfister said in a note on Monday, pointing to political uncertainty on both sides of the border as well as the possibility of an interest rate cut this week in Mexico even as inflation remains a concern.
“We can imagine that the peso could benefit somewhat in the coming weeks and recover some of last week’s losses,” he added, but even early next year “we see worse times ahead.”
A weak U.S. labor market report on Friday added to expectations of a slowdown in the U.S. economy, with the unemployment rate jumping to a nearly three-year high of 4.3 percent in July.
Mexico is very sensitive to economic developments in the United States, its first trading partner and the destination of more than 80% of its exports.
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