Understanding the USD MXN Exchange Rate: Causes and Effects

Albert Bogdankovich

USDMXN exchange rate, which characterizes the relationship between US Dollar and Mexican Peso as two main currencies, is among the most significant indicators in the sphere of international currency markets. These factors are the economic indicators, political events, and market sentiment; these factors are very vital in business and the investors who are involved in the business of trade between the United States of America and Mexico.

usd mxn

The conversion rate of USD to MXN also known as USD/MXN is a commonly used ratio in the world of finance and trade. As a result of the two countries’ economic relations in terms of import and export, tourism, and investment, this exchange rate is very crucial. An understanding of these factors that affect this exchange rate is beneficial for businessmen, investors and tourists.

The following are the determinants of USD MXN exchange rate. Thus, the following factors can be identified: economic parameters. The United States of America is more developed than Mexico, this is visable in their economic status as seen by their currencies. For example, if the GDP growth rates at the US economy is more than at the Mexican economy, the USD will be stronger than the MXN. On the contrary, if the economic indicators in Mexico are good, they may strengthen the Peso. Therefore, by observing these indicators, one can have some idea on the forthcoming shifts in the exchange rate.

Inflation rates also play other important roles in the analysis of a given country’s economy. Ordinarily, the inflation rate in any country increases and this leads to the devaluation of the particular currency of that country. Should inflation rate be higher in Mexico as opposed to the United States, this will be disadvantageous to the Peso and beneficial to the Dollar thereby concluding to an increased exchange rate of USD MXN. On the contrary, if the US Inflation Rate is greater than the Mexican Inflation Rate, then the Dollar will lose value relative to the Peso.

It also has to be added that the political events and stability are the key factors that define the USD MXN exchange rate. Events such as elections, shifts in the structure of political powers, or even war and terrorism can lead to a change in currency values. For instance, trade relations and negotiations between the US and Mexico sentiment that influence the market and the exchange rate. The stability of politics in both the countries also mean that the exchange rates will also be relatively stable.

In both the countries’ central banks the interest rate paradigms are also equally significant. Higher interest rates in US attracts investors from other countries in an attempt to get higher returns on their investments, which in turn increases the demand for Dollar and hence the possibility of the USD MXN exchange rate. On the other hand if the Banco de México decide to raise the interest rates then the Peso may be strengthen.

Emotions and speculations also influence the exchange rate of the currency in the market. Traders and investors always strive to comprehend the market situation and the news of the day, financial indicators, and areas of operation in order to make profitable decisions. They all can cause the short-term changes in the USD to MXN exchange rate. Therefore, news of the Mexican economy is good or bad news relating to the US will lead to the appreciation of the Peso and the opposite.

Firms participating in the international business need to find the exchange rate between USD and MXN for pricing and cost analysis and management purposes. The exchange rate is a crucial factor and importers and exporters should monitor it in order to reduce on risks and enhance efficiency. Both the countries also have to consider fluctuation in exchange rates while evaluating investment prospects in the two countries.

To sum up, the USD MXN exchange rate is a sensitive factor that depends on the economic indicators, the inflation rates, the political situation, the interest rates, the investors’ mood. It is for this reason that one needs to be sensitive to these factors when operating business and investing in the cross-border between the United States and Mexico. Therefore, this paper seeks to enhance the knowledge of business and investors on the factors influencing the USD/MXN exchange rates to enable them to make the correct decisions on risk management in international finance.

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