Mexican Peso Falls as Trump’s Tariff Threats Shake Markets

The Mexican peso started the week on a weaker footing, depreciating against the U.S. dollar on Monday as global markets reacted to Donald Trump’s latest trade policy announcement. The former U.S. president declared plans to impose a 25% tariff on all steel and aluminum imports, sending shockwaves through financial markets and weighing on Mexico’s currency.

By mid-morning, the USD/MXN exchange rate had climbed to 20.6343 per dollar, reflecting an 0.44% loss for the peso compared to Friday’s closing level of 20.5450, according to Banco de México (Banxico).

How the Dollar Strengthened Against the Peso

The peso’s decline coincided with a broad strengthening of the U.S. dollar, as investors sought safer assets amid growing trade tensions. The U.S. Dollar Index (DXY), which measures the greenback against six major currencies, rose 0.22% to 108.28 points.

Financial analysts at Banco Base attributed the peso’s depreciation directly to Trump’s tariff announcement. Given that 82% of Mexico’s steel, aluminum, and related manufacturing exports go to the U.S., the potential economic impact is substantial.

Market Forecast: Peso Faces a Volatile Trading Week

Currency strategists at CiBanco forecast the peso trading within a range of 20.30 to 20.80 per dollar this week, with market volatility expected due to key economic events in the United States:

1. U.S. Inflation Data: The latest Consumer Price Index (CPI) figures will influence expectations for Federal Reserve policy.
2. Jerome Powell’s Testimony: The Federal Reserve Chairman is set to address the House of Representatives, potentially offering insights into interest rate policies.

Traders and investors will closely monitor these developments, as higher-than-expected inflation could further strengthen the dollar, putting additional pressure on the peso.

Banxico’s Monetary Policy in Focus

Domestically, the peso’s movement is also being shaped by Mexico’s central bank. Victoria Rodríguez Ceja, Governor of Banxico, recently signaled that inflation trends may allow for further interest rate cuts.

Last week, Banxico cut its benchmark interest rate by 50 basis points, reducing it to 9.5%—a move larger than the 25-basis-point adjustments previously seen since rates began declining from the record 11.25% peak in March 2024.

Lower interest rates generally make Mexican assets less attractive to foreign investors, contributing to the peso’s depreciation. However, policymakers hope that easing borrowing costs will boost economic growth and stabilize inflation over the longer term.

The Road Ahead: Key Factors Driving the Peso

As Mexico’s currency navigates external pressures from U.S. trade policy and internal shifts in monetary policy, several factors will dictate its future trajectory:

• Trump’s Trade Rhetoric: Any escalation of tariff threats could heighten market fears, further weakening the peso.
• Federal Reserve Decisions: Hawkish Fed policy could support the dollar, increasing pressure on emerging market currencies.
• Banxico’s Rate Path: Mexico’s central bank must balance supporting growth with controlling inflation, impacting investor sentiment.

For now, traders and businesses will remain on high alert, watching for further policy shifts from both Washington and Mexico City as the peso faces a pivotal trading week.