The Gentle Giants

Why is the Mexican Peso So Strong, You Ask?

Wondering why the Mexican peso is so strong? So are a lot of people, including some in the business community here. The Mexican currency is currently trading about 17 to one dollar in Juarez money exchange houses, shedding its seven-year tendency to be undervalued versus the U.S. dollar, according to University of Texas at El Paso (UTEP) research. That reflects “healthy exports to the United States, higher interest rates in Mexico than in the United States and more money remittances from Mexicans living abroad,” the research said.

The strong peso has become a global attraction for foreign investment, shoring up Mexican economic stability. But this trend could shift quickly. “If the economy slows in the United States, then the Mexican peso will likely depreciate against the dollar,” the UTEP study said. In a free-floating world, the value of currencies is determined in large part by international investors’ appetites for risk and growth. The dollar is a global reserve currency, meaning that it’s held by central banks and used to facilitate large transactions. It tends to appreciate versus other currencies when investors are risk-averse, as it’s considered a safe haven. In addition, the price of commodities such as gold, silver and crude oil are usually priced in dollars, driving up the value of the dollar relative to other currencies.

As the world grapples with a new normal in trade and investment, the dollar’s dominance will probably continue to grow. That will put a premium on stable, well-run countries with strong manufacturing, low debt and reliable financial systems.

Investors are looking at Wondering why the Mexican peso is so strong? as a prime candidate because of its proximity to the United States, its relatively high level of education and technical training, the strength of its manufacturing base and its low labor costs. It’s also covered by the U.S.-Mexico-Canada Agreement, a slightly modified version of its predecessor North American Free Trade Agreement that bolsters low-tariff trade within the region.

Moreover, the country’s government is taking steps to rein in inflation and lower public debt. The latter is a major challenge for many emerging economies, but a recent report by CME Group -0.6% Senior Economist Erik Norland says that Mexico’s current public debt is just 41.6% of its GDP — significantly less than the ratio for Brazil and Colombia.

The strong peso is a boon for tourists, who can get more for their dollars here. But it’s also hurting some businesses here. In Downtown El Paso, the strong peso has cut into retail sales, especially for merchants who sell to U.S. residents, UTEP researchers say. The peso’s rise has also lowered the purchasing power of Mexicans who go shopping in the United States. As a result, many people are not visiting as much as they did before the peso got stronger. And fewer tourists means a smaller economy. That could have long-term effects on jobs and real estate development in El Paso and across the border.