The U.S. dollar and Mexico's peso used to walk hand in hand before a variety of financial crises sent the Mexican currency reeling to the point that now, while the peso has made vast strides in recovery and stabilization, the dollar remains a necessary crutch, say economics professors at New Mexico State University. The dollar's strength bolsters the value of the peso, the basic unit of money in Mexico, so economic uncertainty that begins as a ripple in the United States is felt more acutely south of the border, says Jim Peach, an economics professor at NMSU since 1980.
Peach says the economic adage "If the U.S. economy catches a cold, Mexico's economy catches pneumonia" still holds true.
Associate professor Chris Erickson, who has taught at NMSU for 22 years, says Mexico continues to be an important supply line to the United States, and the valuation of either currency is critical to the flow of imports and exports across the border.
Peach says the economic adage "If the U.S. economy catches a cold, Mexico's economy catches pneumonia" still holds true.
Associate professor Chris Erickson, who has taught at NMSU for 22 years, says Mexico continues to be an important supply line to the United States, and the valuation of either currency is critical to the flow of imports and exports across the border.
- From 1954 to 1976, the peso's valuation was fixed to the dollar's, Peach says. In 1976, Mexico's inflation forced the country to decouple the peso from the greenback and devalue it to 22 pesos to the dollar. In 1982, Mexico faced rising international debt and was forced to let the peso's valuation "float." Sink, however, might be a more accurate description. The valuation dropped from 22 pesos to a dollar to 42 pesos to a dollar in a month. By that summer it had fallen to almost 150 pesos to the dollar.
Erickson says the 1980s was a turbulent time for all currencies, including the dollar. But the U.S. was able to curb its inflation, which stabilized the dollar. Continued national crises in Mexico and its mounting debt, however, meant the free fall of the peso in the 1980s was just the beginning, Peach says. - The peso's downward spiral in valuation continued through the 1980s and into the next decade, so that by 1993 the peso exchange to the dollar was 3,000 to one. "At that time the peso wasn't worth the metal it was made of," Peach says. "Telephone calls from payphones still cost a peso, but companies didn't see the worth in collecting them (from the payphones)."
In response to the crisis, Mexico introduced the "nuevo peso"-- the new peso -- and valued it at three pesos to a dollar. "They basically erased three zeros," Peach says. While the country faced challenges, such as the 1994 Chiapas uprising, the peso's valuation remained relatively stable.
Erickson says the dollar, in contrast to the peso, has grown steadily stronger since the 1980s. "From the mid-1980s to now, we've had the most stable economy in the world," Erickson says. "It's the longest run of any industrialized country." - Peach says the peso-to-dollar exchange in 2008 reached a high of 15 to 1, and in October 2009 it was at about 13 to 1 with minimal fluctuations occurring on a daily basis. The current economic crisis in the U.S. has put most of the pressure on the peso, since Mexico exports about one-third of its GDP, with much of those exports going to the United States, says Peach.
Mexico's economy also hinges on oil prices, which also have dropped, and its domestic oil production, which is down. But Erickson says Mexico, with its relatively low inflation and high interest rates, which makes the peso more attractive to international financial markets, is better equipped to handle the current crisis than those in the past. - While the dollar certainly has wavered during this latest economic turmoil, it remains relatively strong mainly because of U.S. Treasury Bonds, "the gold standard of the financial world," Peach says. "(The U.S.) has been in debt since 1787, since the (drafting of the) Constitution," Peach says. "But we've established ourselves as a credit-worthy country. We've never defaulted."
International confidence in the recovery of the dollar also continues to keep it strong. Erickson says the dollar is a reserve currency that countries hold all over the world to back their own currency. So when the dollar depreciates, countries buy it up so that the dollar's valuation stabilizes or bounces back in appreciation again. - Peach says he expects the peso to recover in valuation as the United States climbs to economic recovery. "In the '80s and the '90s, if you were well-to-do (in Mexico), you got rid of your pesos for dollars. It's called 'capital flight.' We're not seeing that right now," Peach says. "We're not seeing a huge change--12, 13, 15 ... It's not like 22 to 3,000."
While the downturn in peso/dollar exchange rates might not be so perceptible on the northern side of the border, Peach says it is something that can be felt on the streets of Mexico. "It means less goods are sold, it could mean a loss of jobs," Peach says. "That's when you feel it."
Erickson says he believes the U.S. economy is suffering from something more than a cold, which means the dollar and the peso both suffer. "We need bedrest right now," Erickson says. "But we are recovering, slowly. And Mexico's recovery is closely linked to us. They'll recover, too."
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