In a huge blow to Mexico’s ailing economy, the peso plummeted for the fourth straight day, reaching values not seen since mid-2022.
This downturn follows the implementation of a new 25% tariff on imports from Mexico by US President Donald Trump.
The tariffs took effect on Tuesday, prompting concerns regarding the economic stability of Mexico, which relies heavily on trade with its northern neighbour.
Approximately 80% of Mexican exports are sent to the United States, making the country particularly vulnerable to changes in US trade policy.
As markets opened in Europe on Tuesday, the peso weakened almost 1%, trading at 20.85 to the dollar.
This shift has contributed to a surge in market volatility, with key indicators reaching their highest levels in nearly a month.
According to Reuters, economists and market analysts fear that a prolonged period of tariffs could plunge the Mexican economy deeper into a recession, compounding the existing challenges posed by external and internal pressures.
Response from Mexico’s government
Mexican President Claudia Sheinbaum said on Tuesday that there was no reason for US President Donald Trump’s 25% tariffs on Mexican imports and that her government will reply with tariff and non-tariff measures yet to be announced.
“There is no explanation, rationale, or justification for supporting this action, which will damage our people and nations… “No one wins with this decision,” Sheinbaum remarked during a press briefing this morning.
This represents a 22% depreciation of the peso since last April, a decided change in market view.
This drop, analysts say, can be attributed to increased fears over US trade policies and a continued period of change in domestic politics causing uncertainty within the market.
Mexico’s central bank is facing mounting pressure to ease policy further as soaring borrowing costs collide with sinking growth.
Uncertain future for Mexico
According to a recent poll released by the Central Bank, analysts in the private sector have revised their growth expectations down from a rather low 1% forecasted at the beginning of the year for Mexico´s economy to a mere 0.81%.
That revision highlights a growing belief that the tariffs are slowing the economy and intensifying the risk of an economic slowdown more broadly.
The peso’s moves have been modest compared to the magnitude of the tariffs, MUFG analyst Lee Hardman said to Reuters: “Price action indicates that the market is still betting on the notion that these tariff hikes will not remain in place indefinitely, containing the damage to trade and the economy.”
But he warned that if the tariffs are kept on for too long, the Mexican economy will probably slide into recession.
The peso, along with the Canadian dollar, which has suffered similar pressures, could lose another 5-10% if tariffs remain said Hardman.
The CAD has already dropped close to 4% since Trump’s election win.
Stock market reaction
Negative economic signs extend beyond the currency market. Mexican stock market. The Mexican peso (MXX) has fallen over 5% in recent weeks due to market concerns about the impact of tariffs.
Still, the market is 3% above where it was before Trump’s election in November, even with this slump.
Major Spanish banks like Santander (down 5%) and BBVA (down 5.8%), which do big business in Mexico, showed marked declines in stock performance today as well, an indication of how a weaker Mexican economy is rippling back to impact broader international markets.
Just last week, the plummeting value of the Mexican peso amid the economic fallout from the US new tariffs laid bare the vulnerability of Mexico’s trade-dependent economy.
And for a country where a large share of its exports are to US markets, it will be an uphill battle to stabilize its currency and protect against a recession.
The post Mexico’s peso drops sharply as new US tariffs fuel economic uncertainty appeared first on Invezz
