Mexican Peso Sinks as U.S. Tariffs Take Effect, Markets Brace for Retaliation

The Mexican peso dropped sharply on Tuesday, March 4, 2025, following the implementation of U.S. President Donald Trump’s 25% tariffs on Mexican imports.

The peso weakened by 1.01%, trading at 20.9262 per USD by midday, compared to Monday’s close of 20.7176 per USD, marking its fourth consecutive day of losses.

This decline extends the peso’s year-long slide, now down 22% since April 2024. Mexico’s trade-dependent economy, which sends 80% of its exports to the U.S., faces significant pressure from these tariffs.

President Claudia Sheinbaum announced that Mexico would respond with both tariff and non-tariff measures, further escalating tensions. Markets reacted overnight as the peso hit a high of 20.9360 per USD, nearing the psychological barrier of 21.00 per USD.

The tariffs come amid troubling economic data for Mexico. January’s trade deficit widened to $4.55 billion (R$27.3 billion), driven by a 5.9% year-over-year increase in imports to $49 billion (R$294 billion) and a sharp 40.6% drop in oil exports.

Mexico’s Economic Outlook

Fourth-quarter GDP contracted by 0.6%, marking the steepest decline in four years, while manufacturing activity contracted for the eighth consecutive month. Market analysts expressed mixed views on the peso’s trajectory.

Lee Hardman of MUFG noted that the peso’s initial reaction was relatively restrained given the scale of the tariffs. However, he warned that prolonged trade disruptions could push Mexico into recession.

Eduardo Ramos of VT Markets emphasized that upcoming weeks would be critical in assessing the full impact of these tariffs and Mexico’s countermeasures.

Despite broader weakness in emerging market currencies, the U.S. Dollar Index (DXY) fell slightly to 106.23, reflecting investor caution about global growth risks tied to escalating trade wars.

Technical indicators suggest bearish momentum for the peso, with resistance at 21.00 per USD and support near 20.70 per USD. Trading volumes surged as investors sought safe-haven assets like the dollar, while ETF inflows into U.S.-based funds increased.

The peso’s outlook remains uncertain as markets await Mexico’s retaliatory measures and further developments in U.S.-Mexico trade relations. Economists forecast that USD/MXN could stabilize near 20.85 by year-end but caution that prolonged tariffs could lead to deeper economic challenges for Mexico.