US Tax Overhaul Drives Down Value of Mexican Peso

Mexico’s currency, the peso, has fallen to its lowest level since March 2017 amid concerns that a US tax overhaul could reduce investment flows to the country.

The peso dropped as low as 19.72 to the dollar in trading on Friday, but has remained slightly above its all-time low hit in January 2017, which occurred soon after Donald Trump took office.

Now the latest blow for the peso seems to have come from the US government’s decision to cut corporate taxes, alongside the initial fear that Trump would impose duties on goods imported from Mexico.

Rising inflation and stalled renegotiation of the North American Free Trade Agreement (NAFTA) are also contributing to the peso’s collapse.

Investors are of the belief that low corporate taxes in the US might make Mexico less attractive for American businesses.

Aware of the potential impact, the Mexican central bank tried to boost the peso’s value by selling off an additional US$500 million in a foreign currency auction, but the tactic failed to convince investors who have continued to sell the currency in the forex market.

Another reason for the peso’s weakness is rising inflation, blamed on the high cost of natural gas. Mexico imports US$4 billion worth of natural gas from the US every year.

Business uncertainty over NAFTA and the upcoming presidential elections are likely to keep the currency market volatile in 2018 as well.

Trump specifically threatened to slap a tax on Mexican remittances to pay for his proposed border wall, which would likely drive the peso even further south.