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Going to Mexico? Better pack more dollars

August 1, 2008 |  3:15 pm

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.

Oldpesocoin 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