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Thursday, October 9, 2008

Death of the Superpeso

By Jeremy Schwartz | Thursday, October 9, 2008, 08:08 AM

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This summer, as the peso surged against the dollar, folks around here were talking about the “superpeso” as the Mexican currency, trading at 9 to 1, reached heights it hadn’t seen in years. But in recent weeks, the peso has been absolutely hammered by the currency markets, falling 45 percent against the dollar. Yesterday, the peso briefly fell to an exchange rate of about 14 to 1, sparking emergency action by the Mexican government to keep the peso from spiraling out of control.

While higher interest rates in Mexico had propped up the peso for most of the year, the financial crisis in the U.S. has turned the greenback into a “safe haven” for investors, pumping up its value. And in this shaky economic climate, risk adverse investors have been leery of the peso.

So Mexico has decided to flood its banking system with dollars, auctioning off $2.5 billion to Mexican banks at lower exchange rates. The gambit appeared to work yesterday, bringing the dollar down to just over 12 pesos. The government plans to continue its daily dollar auctions as long as the peso continues falling.

Mexican officials remained upbeat Wednesday, insisting that a crisis is not on the horizon. Finance minister Agustin Carstens told reporters: “Our currency is for now, I would say, one of the best options to invest in.”

Mexicans should hope so - a strong peso means cheaper imports and lower prices for consumer goods. The opposite means more strain for this now-struggling economy.

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