The Super Peso
The peso has strengthened from over 25 per dollar in 2020 to about 18.4 today, one of the strongest emerging-market rebounds.
Mexico’s high interest rates and attractive yield spreads have drawn global investors into peso-denominated assets.
Robust exports, foreign direct investment, and nearshoring trends have underpinned the peso’s resilience.
A weaker U.S. dollar and improved global risk appetite have also boosted the currency.
Risks remain, with the 2026 USMCA renegotiations and potential U.S. trade frictions seen as key tests for the peso’s durability.
TLDR:
Since plunging to over 25 pesos per dollar in 2020, Mexico’s currency has staged a dramatic recovery, trading around 18.4 today. Analysts say the rally reflects both attractive yields and resilient trade inflows, alongside a softer U.S. dollar. But with USMCA renegotiations looming in 2026, the peso’s outlook depends heavily on international confidence and stable cross-border ties.
From 2020 to 2025: A peso rebound
To measure how “strong” the peso is today, we need a baseline. In early 2020, the peso was under severe pressure: in March 2020, in the early shock of the COVID-19 pandemic, the peso breached 25 MXN per USD as global markets panicked. Wikipedia+2MacroTrends+2 Over that year, the average exchange rate hovered much weaker than today. By contrast, as of September 2025, USD → MXN is trading around 18.37 pesos per dollar (spot) FRED, with USD/MXN shown at ~18.40 on trading platforms. Trading Economics+1
That implies a large appreciation of the peso relative to its weaker pandemic-era levels. If one had held pesos in 2020, in dollar terms it would have been deeply eroded; now, the peso is much more valuable relative to the dollar. Of course, 2020 was an extreme moment of stress, so the comparison partly reflects recovery, not just outperformance. But even compared to more “normal” years post-2020, the peso’s performance is notable.
How much is Mexico’s policy versus U.S. dollar weakness?
When a currency strengthens, two broad sets of forces may be at work: domestic (macro, interest rates, confidence, capital flows) and external (the strength or weakness of the counter-currency, here the U.S. dollar). Let’s decompose what we know.
U.S. dollar behavior and global environment
Through 2025, the U.S. dollar has lost ground against many emerging-market and advanced economies, as global risk sentiment improved, inflation pressures globally eased, and the Federal Reserve’s tightening cycle reached diminishing returns. Banxico, Mexico’s central bank, notes that the dollar “depreciated against most currencies in advanced and emerging economies until the last weeks of July” in its latest Quarterly Report. Bank of Mexico That easing of upward pressure on the dollar gives emerging-market currencies more room to rally.
Thus, part of the peso’s strength is relative weakness in the dollar — particularly when global funds rotate back into riskier assets. But that does not fully explain the magnitude of Mexico’s move.
Domestic drivers: yields, capital flows, monetary policy
A recurring narrative in market commentary is that Mexican interest rates and yield spreads remain attractive relative to U.S. Treasuries, fueling “carry trade” flows into Mexican assets. In effect, investors borrow in low-yielding currencies (or less constrained ones) and place funds where yields are higher — a classic emerging-market dynamic. The peso’s 2025 advance of roughly ~11 % since April is often attributed partly to that mechanism. Equiti Default The Financial Times also highlights that the peso’s rally was strengthened when U.S. tariffs were delayed and volatility subsided, drawing yield-seeking capital back into Mexico. Financial Times
Mexico’s central bank has also gradually eased interest rates along the yield curve in 2025, as noted in Banxico’s report. Bank of Mexico That might seem counterintuitive — one could argue that lowering interest rates weakens a currency — but if markets interpret the easing as a sign of growth stability or confidence, and if yield spreads remain positive, it can still attract capital flows. Critics argue that once the yield premium narrows, the attractor will fade.
Nevertheless, yield differentials are not always enough. As some analysts caution, the peso continued strengthening even when the implied country-risk premium (policy-rate differential) had declined, suggesting that other factors beyond pure carry are at work. Equiti Default
Also important is macro stability, fiscal credibility, and inflation control. Mexico’s inflation outlook, institutional strength, and investor confidence all feed into how eager foreign investors are to commit capital to pesos-denominated assets. If uncertainty around policy, rule of law, or trade tensions increases, that could reverse the trend.
In sum: Mexico’s policy environment (interest rates, relative yields, macro credibility) has likely played a meaningful role — perhaps as much as or more than pure dollar weakness. But the exact breakdown is hard to quantify with public data.
The role of trade, FDI, and external flows
A currency’s strength — particularly in an emerging market — is deeply connected to external flows: exports, foreign direct investment (FDI), and trade balances.
Exports, trade balance, and resilience
Mexico has retained strong export momentum despite headwinds and tariff tensions. According to BBVA’s mid-2025 trade report, monthly exports to date have stayed within USD $50–56 billion and imports in USD $49–53 billion, resulting in a slightly positive trade balance over recent months. BBVA Research That means Mexico is not being forced to run large current account deficits that undermine the peso.
Further, a weaker (or historically soft) peso in earlier periods helped export competitiveness, but the rebound is now less of an export-driven devaluation play and more of a normalization. The volume of trade, integration in U.S. supply chains, and demand for manufactured exports (especially under USMCA) all provide a structural underpinning to capital inflows and confidence in the peso.
Foreign direct investment and portfolio flows
FDI and portfolio inflows are central to sustaining peso strength. Mexico remains a favored destination for nearshoring and re-shoring investments, given its geographic proximity to the U.S. and relatively competitive labor costs. That structural trend pre-dates 2025, but the broader global push to diversify supply chains has continued to benefit Mexico.
Capital markets also matter: Mexican bonds (sovereign and corporate) with attractive yields draw non-resident investors. When those investors buy pesos to invest, that supports the currency. The earlier “carry trade” effect is one manifestation of that. A positive feedback loop may exist: yield-seeking investors drive peso strength, strengthening macro confidence, which further attracts capital.
However, these flows are sensitive to risk perceptions: if investors worry about trade conflicts, regulatory changes, or political risk, some of that capital could exit, putting downward pressure on the peso.
Sensitivity to U.S. linkages and supply chains
Because Mexico is deeply integrated with U.S. manufacturing and supply chains, shocks in U.S. demand or trade policy translate quickly into pressure on Mexico’s trade and currency. If U.S. demand weakens or tariffs intensify, export-linked industries in Mexico may suffer, reducing foreign exchange inflows and weakening the peso. So the peso’s strength is conditioned on continued openness and stable U.S.–Mexico trade relations.
In sum, the peso’s recent strength is not just financial flows but interconnected with Mexico’s trade performance, export resilience, and ability to maintain FDI momentum. Without those fundamentals, yield spreads alone would be more vulnerable to reversal.
What about USMCA renegotiation in 2026?
An important wild card for Mexico’s currency trajectory is the upcoming review and possible renegotiation of USMCA (the trade agreement with the U.S. and Canada). The agreement includes periodic review provisions, and many analysts expect renegotiation or updates starting late 2026 or early 2027. FocusEconomics
Stakes of renegotiation
Rules of origin and local content: The U.S. may push for stricter rules to force more value-added in North America. If Mexico is pressured, some supply chains might be disrupted or investment flows altered.
Labor and environmental standards: U.S. negotiators may demand adjustments or enforcement changes in these fields. Noncompliance or uncertainty can reduce investor confidence.
Sectoral shifts: Auto, electronics, and other key sectors may face rebalancing, which can affect Mexico’s export base and thus foreign exchange inflows.
If renegotiations create uncertainty — or if the U.S. demands terms unfavorable to Mexico — it could undermine investor sentiment, weaken FDI, or reduce export growth. That would directly affect the peso’s fundamentals.
On the positive side, if Mexico negotiates favorable updates (or maintains favorable terms), it would reinforce confidence in Mexico as a stable trade partner and support currency strength.
Timing and risk
Because a full renegotiation is unlikely before late 2026, markets may start pricing in risks earlier. Speculation about stricter U.S. demands or renegotiation outcomes can lead to volatility. Mexico must carefully manage expectations and maintain transparency to avoid destabilizing capital flows.
The broader risk: if Mexico is seen as too malleable or too constrained in negotiating leverage, it could lose bargaining power — and markets may perceive that as increasing trade risk premium on Mexican assets.
Thus, the USMCA renegotiation is not just a long-term political issue; it will likely become a medium-term factor influencing how foreign investors perceive Mexican risk and return, and therefore impacting the peso.
Outlook and key risks
Putting this together, here’s how I see the peso’s trajectory in the near-to-medium term:
Likely scenario (neutral to modest upside):
The peso may continue to benefit from relative yield advantages, stable trade flows, and moderate U.S. dollar softness.
If U.S. macro or interest rate cycles ease, and Mexico holds its macro house in order, the peso could appreciate modestly further, perhaps testing 17–18 MXN per USD.
Investor confidence will remain key: strong governance, rule-of-law signals, and trade stability will help sustain flows.
Risks and downside pressures:
U.S. dollar rebound — If the dollar regains strength (due to global uncertainty or Fed surprises), peso gains could reverse rapidly.
Erosion of yield premium — If Mexico’s yields compress relative to the U.S., the carry trade incentive weakens.
Trade shocks or tariff escalation — Any new U.S. trade measures or border frictions could harm Mexican exports and capital inflows.
Renegotiation risk — Adverse USMCA renegotiation outcomes or market perception of weakened Mexican bargaining position could raise risk premia.
Domestic policy risk — Political instability, changes in regulation or investor-unfriendly reforms, or weakening institutions could spook capital flows.
Mexico’s policymakers will need to strike balance: maintain attractive yields, reinforce credibility, manage inflation, and navigate U.S. trade pressures carefully.