Mexican Peso Falls on Fed Hike Bets

The move matters because the peso has been one of the region’s key carry-trade beneficiaries, helped by Mexico’s relatively high interest rates. That advantage narrows when US rates rise. Banxico kept its benchmark rate at 6.5% on Thursday and signaled it will not automatically follow the Fed, but the differential has still been cut to 2.50 percentage points after last week’s 25-basis-point increase in Washington.

Markets are now pricing a 64.20% probability of another Fed hike in October, according to CME FedWatch. Higher US rates tend to support the dollar by making dollar assets more attractive and can pull capital away from currencies such as the peso, especially when inflation remains sticky and the US economy stays strong.

The peso traded in a wide range intraday, touching 17.7794 per dollar, its weakest level since April, before recovering. The dollar index slipped 0.23% to 101.01, suggesting the peso’s losses were driven less by a broad dollar surge than by Mexico-specific sensitivity to rate expectations and carry-trade flows.

Analysts also pointed to headlines around possible US-Iran talks on reopening the Strait of Hormuz, while oil prices fell nearly 2%, easing some inflation worries. Still, the bigger driver for investors remains the Fed path: if another hike lands in October, the peso could face further downside as the rate gap with the US narrows again.

For now, the currency is holding near levels that leave it vulnerable to further volatility heading into the next Fed decision and any fresh Banxico guidance on how long Mexico can keep rates elevated relative to the US.