Going to Mexico? Better pack more dollars

The Mexican peso’s value surged against the dollar today and crossed a milestone: At the official exchange rate (i.e., the rate for big-money transactions) one dollar now buys fewer than 10 pesos.

The last time the peso was this strong -- and the dollar so weak -- was in 2002.

At the official rate, one dollar bought 9.94 pesos today, down from 10.04 on Thursday and 10.89 at the end of last year, according to Bloomberg data.

The rate American tourists get already had fallen below 10 pesos in recent weeks, however, because the exchange rate for small-money transactions almost always is less favorable than the official rate.

As noted here, the peso has been on a hot streak since the end of June, bolstered in large part by the Bank of Mexico’s commitment to fighting inflation by raising interest rates. The bank hiked its key short-term rate from 7.50% to 7.75% on June 20 and lifted it again, to 8%, on July 18.

Higher interest rates tend to attract global investors to a country’s bonds and money market accounts, which in turn supports its currency.

With the U.S. Federal Reserve’s benchmark rate at just 2% -- and virtually no chance of the Fed raising that when policymakers meet Tuesday -- the rate gap between the two countries is nearly as wide as the Gulf of Mexico. And that’s bullish for the peso.

The strong peso gives Mexicans more purchasing power, of course, and has the opposite effect for American tourists headed across the border.

But a robust peso is no good for Mexican exporters, and that’s the challenge for the Bank of Mexico: How much economic damage is it willing to risk, with high interest rates, to beat back inflation?

Photo: Antique pesos. Peter Stone / Los Angeles Times

Comments

[Ed C.]

Well, I guess America is really the new China for all nations.

[Tim]

@ Ed C. - Only problem with your analogy of the US being the new China is that we are not producing any goods that we are selling to the rest of the world, we are still wrapped up in the belief that we are a technological and service society, whatever the heck that means. Wouldn't it be a nice sequence of events if the economic tables were turned for the U.S. and Mexico. Damn, the US is already having a very difficult time keeping up with Canada. What a shame, yet, we had a whole lot of fun with those 300 dollar rebate checks.

[falso]

If you are coming to Mexico you'd better not pack any of what is shown in the photo. With the exception of the one-peso coin in the background, none of it appears to be current legal tender.

[martscan]

Other comments notwithstanding, if the U.S. was not enjoying our current export business we'd be in a depression. Its the one segment of our economy holding up the rest.

[Michael Lee]

I don't care what the exchange rate is, the real issue is what is charged in pesos. Over the last 10 years I have been to Mexico about 8 times. What dinners were averaging 80 to 100 pesos back then are now 300 to 400 pesos. The prices have grown to match ours.

[anthony]

Can you imagine. We build a wall along the border. Then the dollar weakens to the point where the wall is to Mexicos benefit!

[AndyS]

Great! The American dollar is turning into the American peso. We may have also inadverntently solved our immigration crisis by making America to cheap to be in.

[SouthBaySM]

Maybe our Fed can learn something from the central bank down south and raise rates to fight inflation here. Our mentality is all geared towards spending money at any cost.

[Jack]

Hang on folks cuz the real stuff is still ahead of us...US dollar and economy will get worse through 2008...and probably won't recover until 2010 or after