Peso Weakens to Five-Month Low as Banxico Holds Rates Steady

Mexico City — The Mexican peso weakened Thursday to its lowest level in more than five months after the Bank of Mexico held its benchmark interest rate steady and said its next moves will hinge on how inflation develops.

The currency closed at 17.7148 pesos per dollar, a depreciation of 1.16% and the strongest level for the U.S. dollar since 17.7669 on April 6, according to central bank closing data. The drop came a day after the peso posted its sharpest percentage decline since early March, driven by a broad rally in the dollar on rising expectations that the U.S. Federal Reserve will raise rates again in the near term.

Banxico also said it will not react mechanically to Fed decisions. The U.S. central bank raised its rate by 25 basis points last week and projected at least one more increase before the end of the year.

“This strikes us as a message with an accommodative and not very cautious bias given the prevailing outlook of high uncertainty and volatility,” the financial group Banamex said.

Banamex said the majority of Banxico’s governing board leaned toward weighing rate cuts, pointing to the slack it estimates in the economy. But the shift toward tighter policy in the United States and other advanced economies would limit the room for cuts.

In a report, Banamex said the interest rate differential between the United States and Mexico, now at historic lows, is already showing up in the exchange rate. Base, another financial group, said the narrower gap is consistent with a weaker peso and forces it to revise its exchange rate forecast upward to 17.80 pesos per dollar, with a chance of reaching 18 per dollar by the end of the year or early 2027, depending on market expectations for U.S. and Mexican rates.

Carry Trade Loses Its Allure

Banxico’s message reinforced expectations that it will keep its key rate unchanged for an extended period. A Reuters poll on Monday showed the market expects the central bank to hold steady at least until the second half of 2028.

By contrast, a wave of recent comments from Fed officials, including John Williams, Beth Hammack and Anna Paulson on Thursday, cemented the view that further U.S. rate increases may be needed to contain inflation.

Investors are therefore focused on the yield differential between Mexico and the United States, a factor that has long driven foreign inflows into local markets.

Base said the peso’s recent slide should not be seen as temporary but as the product of reduced appeal for carry trades — an investment strategy in which money is borrowed in a low-yield currency and then invested in another currency or asset offering a much higher return.

The firm expects the exchange rate to trend higher, toward a level closer to equilibrium, posing a risk to inflation but potentially boosting the purchasing power of remittances and improving the relative competitiveness of Mexican exports.

The peso’s decline came alongside a global strengthening of the dollar that touched two-month highs, while oil prices rose after a Houthi missile attack on Saudi Arabia revived fears of a disruption to global supply.

Abroad, the session was marked by the start of a summit between President Donald Trump and Chinese leader Xi Jinping at the White House.