Gold ekes out weekly gain despite Fed rate hike

The Mexican peso faced a significant decline on Friday morning, with traders reacting to the U.S. Federal Reserve's decision to raise interest rates. This was the first rate hike by the Fed since 2023, marking a tightening of U.S. monetary policy. The peso depreciated to 17.32 to the dollar by the morning, and by 2:00 p.m., it hovered around 17.229 to the dollar, marking a nearly 6 centavos decrease from Thursday's closing rate of 17.1706. Analysts predicted a trading range for Friday between 17.08 and 17.28 pesos per dollar.

The Fed's decision came as a surprise to many, including U.S. President Donald Trump, who had nominated Kevin Warsh to head the Federal Reserve, hoping for a lower interest rate. Instead, the Fed raised its benchmark rate by 25 basis points, bringing it to a range of 3.75% to 4%. This decision came after an eight-month period where U.S. interest rates remained between 3.50% and 3.75% since December.

The peso's decline is directly linked to this rate hike, as well as the possibility of further rate cuts in the U.S. in 2023. This is particularly significant for carry trade operations, where investors borrow money in a currency with a low interest rate to invest in a currency with a higher rate. The interest rate differential between Mexico and the U.S. is now at a historic low of 250 basis points, a figure not seen since December 2015.

Mexico's benchmark interest rate stands at 6.5%, and the Bank of Mexico is expected to keep it steady at its next meeting. If the Fed makes another rate hike before the end of the year, the interest rate differential will drop to 225 points, further reducing returns for investors in peso-denominated investments. This is compounded by Mexico's recent inflation trend, which stands at 3.26% as of August, in line with the central bank's target range, while inflation remains more persistent in the U.S. This suggests the Fed will maintain a more aggressive stance, potentially impacting the peso's value even more.