The Mexican peso depreciated by more than 1% against the dollar on Wednesday as the market adjusted its expectations in light of stricter U.S. Federal Reserve policies and the Bank of Mexico’s impending monetary policy decision. 

The spot exchange rate reached 17.50 to the dollar Wednesday, a loss of nearly 20 centavos for the Mexican currency, extending a streak of weakness over recent sessions.

The exchange rate stood at 17.50 to the dollar at 3:20 p.m.Wednesday, Mexico City time.

Pressure on the peso comes from the likelihood of further interest rate hikes in the United States, with the market assigning a probability of approximately 54% to another rate increase in October.

The Fed recently raised its benchmark rate by 25 basis points, bringing it to a range of 3.75% to 4.00%. Markets have interpreted comments from Fed officials as a signal that the fight against inflation will continue to require tight financial conditions.

“Following last week’s interest rate hike, Fed officials have maintained a hawkish tone, reinforcing expectations of up to three additional 25-basis-point hikes through mid-2027,” Felipe Barragán, a market analyst at Pepperstone, told El Economista. 

The exchange rate adjustment takes place ahead of the Bank of Mexico’s (Banxico’s) monetary policy decision on Thursday at 4:00 p.m. local time. Traders expect Banxico to keep its key rate unchanged at 6.50%, signaling what is anticipated to be a considerable period of stability. 

 With Banxico at 6.50% and the Fed at a high of 4.00%, the spread is now around 250 basis points. Another U.S. rate hike, with Mexico remaining unchanged, would once again narrow the interest rate differential between the two countries, making peso-denominated investment less attractive.

Meanwhile, the U.S. currency is also strengthening globally, with the dollar index rising toward 100.7 points, its highest level in approximately eight weeks. A weakened dollar was a major reason for the peso’s earlier strengthening, but those days appear to have ended for now. 

The recent drop in oil prices may help alleviate some global inflationary concerns, but so far, it has not been enough to reverse the strengthening of the dollar.

With reports from XTB