Peso hits one-year low as Fed-Banxico rate gap narrows

The Mexican peso has fallen sharply against the U.S. dollar. On Thursday, the Bank of Mexico recorded a closing USD:MXN rate of 18.71. The last time the peso closed weaker was September 4, 2025. This decline reverses part of the peso’s earlier strength.

On September 4, the exchange rate was 16.89 pesos per dollar, the peso’s strongest level in more than two years. By Thursday, it had weakened 9.7%. A rate of 18.71 means buyers needed 18.71 pesos to obtain one U.S. dollar. More pesos per dollar means a weaker peso.

The latest daily move was modest, at 0.2%, but it extended the slide. The peso also lost 1.1% during the week, after closing at 18.50 last Friday. Analysts point to narrower interest-rate advantages, risk aversion, and USMCA uncertainty as important pressures.

The peso depreciated nearly 10% in just seven weeks. Bank of Mexico data show the exchange rate moved from 16.89 pesos per dollar on September 4 to 18.71 on Thursday. That is a significant change for a currency that had recently reached its strongest level in more than two years.

USD:MXN expresses the value of one U.S. dollar in Mexican pesos. At 18.71, someone exchanging dollars would receive 18.71 pesos for each dollar. Because the number rose from 16.89, the peso lost value relative to the dollar. The percentage depreciation was 9.7%.

The movement continued through the week. The peso fell 0.2% on Thursday and 1.1% for the week, after closing at 18.50 the previous Friday. The article links the broader decline to interest-rate changes, risk aversion, and uncertainty surrounding USMCA.

The Federal Reserve is the central bank of the United States. The Bank of Mexico is Mexico’s central bank. Both use interest-rate decisions to influence borrowing conditions and monetary policy in their economies. Their choices also affect how attractive each country’s financial assets appear to investors.

The article reports that the Fed raised its key rate to a 3.75%–4% target range, while Mexico’s rate stood at 6.5%. If U.S. rates rise while Mexico’s rate stays unchanged, the return advantage available in Mexico becomes smaller. Investors may then have less reason to hold peso-denominated assets.

That change can weaken demand for pesos and support demand for dollars. The article identifies the Fed’s September increase as a key factor behind the peso’s recent depreciation. It also says economists expect another U.S. increase in December, which could narrow the interest-rate gap further.

Interest-rate differences help shape international investment flows. Before the Fed’s increase, Mexican rates offered a larger advantage over U.S. rates. The Fed’s move to a 3.75%–4% target range reduced that spread, while the Bank of Mexico’s rate remained 6.5%.

Using the stated rates, the gap is roughly 2.5 to 2.75 percentage points. The smaller difference makes Mexican assets less compelling compared with U.S. alternatives, especially when investors weigh currency risk. Some investors may reduce peso holdings or choose dollar assets instead.

That shift can put downward pressure on the peso. The article describes the narrower spread as weakening one support for the “super peso.” It also expects the gap could shrink further because all 100 economists polled by Reuters anticipated a Fed rate increase in December.

A carry trade is an investment strategy based on interest-rate differences. An investor borrows in a currency with relatively low interest rates and invests the money in a currency or assets offering higher rates. The expected return comes partly from earning that interest gap.

Mexico’s 6.5% policy rate had offered a larger advantage over U.S. rates before the Federal Reserve raised its target to 3.75%–4%. The smaller difference reduces the potential reward from holding Mexican assets. Currency movements can also affect the result, since a weaker peso can reduce dollar-based returns.

The article says the narrower spread reduced the appeal of carry-trade operations and weakened a support for the “super peso.” If the Fed raises rates again in December while Mexico keeps its rate unchanged, the incentive could decline further. Analysts therefore see the rate gap as an important pressure on the peso.

Interest rates were not the only pressures on the peso. Mexico’s annual headline inflation reached 3.62% in the first 15 days of October, up from 3.45% in September. The peso briefly strengthened after that report, then weakened and closed lower, showing that the market response was unsettled.

The article also reports greater risk aversion amid the U.S.–Iran war. When investors become more cautious, they may prefer to reduce exposure to assets they view as riskier. That can lower demand for the peso. Uncertainty about the future of the USMCA free-trade pact added another concern for investors assessing Mexico.

Together, these factors made the currency environment less supportive. Inflation appears likely to rise for a third consecutive month in October. Analysts do not expect Mexico’s central bank to change its rate at its final two 2026 meetings, while a December Fed hike could add further pressure.

Inflation matters because it signals that prices are rising and can affect confidence in a currency’s purchasing power. Mexico’s annual headline inflation rose to 3.62% in the first 15 days of October, from 3.45% in September. The peso initially appreciated after the data, so the relationship is not automatic or one-directional.

Foreign-exchange prices also respond to investor demand. When investors buy peso-denominated assets, they generally need pesos, which can support the currency. When they become more cautious or shift toward dollar assets, demand for pesos can fall. Greater risk aversion and USMCA uncertainty therefore created additional pressure.

Interest-rate differences connect these forces to investment choices. The Fed’s rate increase reduced Mexico’s return advantage, while another expected U.S. hike could narrow it further. The article’s 18.71 closing rate shows how the peso weakened as these pressures combined, although daily movements can vary.