Mexican peso weighed down by sluggish U.S. growth

MEXICO CITY -- It's been a tough six months for the Mexican peso.

The currency has taken a beating through no fault of its own, analysts say. The Mexican economy is poised to grow a healthy 3 percent in 2012 yet the peso is down 19 percent since July. What gives?

The peso's decline is due to "storms on various fronts," said Joel Virgen, coordinator of economic studies at Banamex -- namely the debt crisis in Europe, expectations for sluggish growth in the U.S. and a pervasive high aversion to international risk.

The Mexican economy is closely tied up with the U.S. economy, leaving investors hard-pressed to separate the economic forecast for one from the other. Virgen said Banamex doesn’t expect the U.S. to slide into another recession in 2012 -- but the bank doesn’t rule out the possibility, either. Mexico's peso has a "high sensitivity" to the economic woes of its northern neighbor.

There are strong fundamentals underpinning the peso, however. Mexico’s central bank is holding a bundle of foreign reserves, amounting to 20 percent of gross domestic product (GDP) versus foreign reserves totaling 7 percent of GDP in 2008. Public debt levels are in check. And even amid weakened U.S. demand, Mexican manufactured products have gained ground, accounting for 12.4 percent of total U.S. imports versus 11 percent in 2009.

All those factors should serve as a crutch for the peso for now and as an eventual catalyst for its appreciation later. Banamex predicts the currency will regain its strength later in 2012.

In the meantime, Mexicans planning to travel north of the border for the holidays will find that their pesos don’t go nearly as far at shopping malls in Texas or in New York City boutiques. The good news is that here at home -- so far -- consumer prices haven't borne the full brunt of the peso's decline; inflation hasn't shot up.

Although manufacturers and retailers might like to share the burden, "the potential for passing on cost has decreased in an important way in Mexico in the past several years," Virgen said. Mexico’s internal market has recovered substantially from a devastating 2009, but demand is still weak -- hampering sellers' ability to raise prices.

The Bank of Mexico listed the exchange rate at 13.82 pesos to the dollar on Thursday.

Photo credit: Flikr/eliazar

This post was originally published on Smartplanet.com