US tariffs drag Mexico's peso, stocks lower

By Marc Jones and Rodrigo Campos

LONDON/NEW YORK (Reuters) -Mexico's peso fell for a fourth consecutive session on Tuesday and briefly touched the 21-per-dollar level for the first time in a month after the United States imposed 25% tariffs on imports from Mexico.

Stocks also fell in Mexico for a fourth day and the benchmark index slid to its lowest in five weeks, with local equities still up over 3% year to date.

The peso weakened as much as 1.5% on the day to 21.002 per dollar, the weakest since a tariff-related selloff in early February, with a key volatility gauge at its highest level in nearly a month.

Mexico's trade-dependent economy sends around 80% of its exports to the United States. President Claudia Sheinbaum said some Mexican agricultural exports like avocados could find other destinations, adding she would announce Mexico's full response at an event on Sunday in the capital's iconic Zocalo square.

JPMorgan analysts said Tuesday they continue to believe tariffs to be temporary, with an immediate price reaction on the peso in a range from 2% stronger to 4% weaker.

The currency has lost a fifth of its value to the dollar since last April, having been hit with both concerns over U.S. trade and domestic political and constitutional changes.

Mexico's bond market borrowing costs have also been falling steadily over the last couple of months due to the expectation that a likely hit to the economy will require the central bank to continue cutting interest rates.

A poll published by the bank on Monday showed that private sector analysts now expect the economy to grow just 0.81% this year, a drop from their already modest January forecast of 1.00%.

MUFG analyst Lee Hardman said the peso's initial moves had been relatively modest, considering the scale of the U.S. duties that both Mexico and Canada are now saddled with.

"The price action suggests that market participants remain hopeful that the tariff hikes won’t remain in place for long, helping to limit trade and economic disruption," Hardman said.

The longer they are in place, the more likely Mexico’s economy will fall into a recession, Hardman added.

"We continue to believe that both currencies (peso and Canadian dollar) could fall by around 5-10% in response to more persistent tariff hikes." The Canadian dollar is down around 4% to the greenback since Trump's election victory last November.

(Additional reporting by Jesus Aguado in Madrid; editing by Kevin Liffey and Mark Heinrich)