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

In just seven weeks, the Mexican peso has depreciated nearly 10% against the US dollar, and on Thursday fell to its weakest level against the greenback in over a year.

The Bank of Mexico’s closing USD:MXN rate on Thursday was 18.71, representing a depreciation of 9.7% for the peso since Sept. 4, when it closed at 16.89 to the dollar — its strongest level in over two years.

The last time the peso closed at a weaker level than 18.71 was on Sept. 4, 2025.

The U.S. Federal Reserve’s decision in mid-September to increase its key interest rate to a target range of 3.75% to 4% is seen as a key factor behind the peso’s recent depreciation as the hike reduced the differential between the Fed’s rate and that of the Bank of Mexico (currently 6.5%). The smaller spread weakened one of the supports of the so-called “super peso,” reducing the appeal of “carry trade” operations.

Other factors have also contributed to the recent depreciation of the peso. They include a greater aversion to risk amid the U.S.-Iran war and uncertainty over the future of the USMCA free trade pact.

Peso’s decline on Thursday was modest, but extended the currency’s slide

The USD:MXN closing rate on Thursday represented a 0.2% depreciation for the peso compared to its position at the end of trading on Wednesday.

The peso has depreciated 1.1% this week after closing at 18.50 to the dollar last Friday, according to the Bank of Mexico.

The depreciation on Thursday came after the national statistics agency INEGI reported that Mexico’s annual headline inflation rate was 3.62% in the first 15 days of October, up from 3.45% in September.

The peso appreciated slightly after the publication of the inflation data on Thursday morning, but it weakened later in the day to close weaker than it did on Wednesday.

The gap between interest rates in Mexico and the US could narrow further soon 

While Mexico’s annual headline inflation rate appears likely to increase for a third consecutive month in October, most analysts don’t anticipate that the Bank of Mexico will make any change to its key interest rate following its final two monetary policy meetings for 2026, scheduled for Nov. 5 and Dec. 17.

In contrast, 100 of 100 economists polled by Reuters in recent days expect the U.S. Federal Reserve to raise its interest rate in December. Such a hike would further narrow the gap between the Bank of Mexico’s benchmark interest rate and the Fed’s, potentially weighing on the peso.

Where will the peso be at the end of the year?

The consensus forecast of analysts and economists from 37 banks, brokerages and research organizations who were recently surveyed by Citi is that the USD:MXN rate will be 18.20 at the end of 2026.

Expectations ranged from 16.80 to 18.90, Citi said in an article published on Tuesday.

The bank noted that the consensus forecast increased to 18.20 from 18.00 in its previous “Mexico Expectations Survey.”