The Mexican currency (peso) dropped on concerns that demand for Mexican exports will drop, the fall in the peso came after Federal Reserve Chairman Ben Bernanke announced a deteriorating U.S. economy.

The fall in the Mexican currency wiped out early gains that were fueled by the expectation that the Mexican central bank will maintain its benchmark interest rate at 7.5% tomorrow.

Investors expect the Peso to bounce back due to the widening gap in the difference between the U.S. and Mexican interest rates, with Mexican assets looking increasingly attractive.
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Ben S. Bernanke rattled world financial markets Monday with his tough talk about combating inflation, but he also buffed up his image as a strong US Federal Reserve chairman committed to the fight, analysts said yesterday.
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The USD extended a recovery on Tuesday from one-year lows against the Euro after Federal Reserve Chairman Ben Bernanke’s pledge to stay vigilant against inflation left the door open for another interest rate rise later in June.
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The prevailing explanation for the sudden, precipitous fall by the USD is that the Fed is nearing the end of its current monetary tightening cycle, at which point interest rate differentials between the US and the rest of the world will begin to narrow. In this vein, Ben Bernanke’s hint that the Fed might end its cycle earlier than expected probably hastened the dollar’s decline.

Forex traders will admittedly be watching economic indicators closely for insight into the Fed’s likely course of action. Read the rest of this entry »