Understanding the Stability of ‘Superpeso’: A Glimpse into the US Dollar and Mexican Peso Exchange Rate

Understanding the Stability of ‘Superpeso’: A Glimpse into the US Dollar and Mexican Peso Exchange Rate

Decoding the Stability of the ‘Superpeso’

On September 23, 2023, the US dollar concluded its trading against the Mexican peso at a rate of 17.1834 pesos. This exchange rate remained stable throughout the week, a significant attribute reflecting the current balance of trade, economic conditions, and market expectations in the United States and Mexico. This stability has earned the Mexican peso a new moniker – the ‘superpeso’. The fluctuations in the exchange rate are of considerable significance to individuals and businesses involved in cross-border transactions, as they directly impact the costs and returns of their dealings.

A Retrospective Look at the History of the Peso

The exchange rate fluctuations of Mexico’s peso against the US dollar have a profound history dating back over 70 years. This history is characterized by periods of stability, turmoil, devaluations, rallies, and stabilization. Intriguingly, the peso has only appreciated against the dollar in periods of free-floating exchange rates, absence of price controls in the domestic market, and unrestricted withdrawal of capital or profits.

The Journey from Fixed Exchange Rates to Free Floating Currency

Over the past seven decades, different measures have been adopted for managing the peso’s exchange rate, largely influenced by the government’s perception of the country’s needs at the time. From 1954 to 1976, the Mexican peso was maintained at a fixed rate of 12.50 old pesos to the US dollar. This period was followed by a series of devaluations, exchange controls, and a gradual depreciation of the currency. The culmination of these devaluations was an economic blowout in December 1994, which led to the adoption of a free-floating exchange rate, a practice that has been maintained to date.

The Roller Coaster Ride: Peso’s Value from Late 1990s to 2023

After briefly reaching 11.50 to the dollar in the late 1990s, the peso experienced several years of ups and downs, gaining to less than 10 to the dollar just before the global economic crisis of 2008. The impact of this crisis was more severe on Mexico than on countries with fewer trade and investment ties. The peso’s value plummeted from 10 to more than 15 pesos per dollar as investors sold Mexican stocks and bonds to meet other obligations.

In the ensuing decade, the peso recovered and stabilized, trading in a range of 13 and 14 pesos to the dollar. However, a further slide began in the summer of 2014, and the currency weakened throughout 2015 and 2016. After reaching a new low of 21.50 in January 2017, the peso began a robust rally and by September 2017, it was trading at around 17.60 on foreign exchange markets. The currency then stabilized again and from 2018 to 2020, it traded in a range of 18 and 20 pesos to the US dollar.

The announcement of the Covid-19 pandemic in March 2020 led to a rapid decline in the peso’s value against the US dollar, with the currency briefly touching 25 pesos. However, the peso quickly regained its footing and by November 2020, it stabilized to trade in a range of between 19 and 20 pesos to the dollar, a range it maintained remarkably during the two difficult years that followed. In 2023, the peso continued to strengthen against the dollar, leading to the coining of the term ‘Super Peso’ in response to the currency’s strength.

The Influencers of Peso’s Value

Several factors influence the value of the peso as a free-floating currency on world foreign exchange markets. These include macro-economic indicators such as inflation, exports, oil prices, foreign currency remittances, and international tourism. The peso’s trading is primarily done against the US dollar, and rates vis-à-vis other currencies are a combination of the two rates or currency pairs as they are known in the trading world.

The Impact of a Strong Peso

While the strengthening of the peso, dubbed as the ‘superpeso’, has been a source of pride for the Mexican government, it has had mixed impacts on the residents of Mexico. For the millions of Mexicans who rely on remittances, a stronger peso means fewer pesos to buy goods and services. This has had a particularly significant impact on rural areas like San Bartolomé Quialana in Oaxaca, where a weaker dollar means fewer pesos to buy livestock, food, and other necessities, or pay for social events like quinceañeras, marriages, and funerals. This has led to a slowdown in sectors like home building. The strengthening of the peso has thus brought about a unique set of challenges alongside the benefits.