The Mexican Peso in danger (mar 1, 1994 – nov 1, 1994)

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March - November, 1994

The crawling peg of the Mexican peso (figure 1) is under fire. Not only does the US Federal Reserve raise its policy rate by 250bps during this time span, Mexico also suffers from political homocides in the lead-up to the presidential elections later that year. Foreign exchange reserves therefore decline rapidly (figure 3). In April, to stop the outflow of foreign currency, the Mexican government issues short term dollar denominated debt, called tesobonos. As investors buying the tesobonos are protected for a potential devaluation of the peso, the outflow of foreign currency stops, while the foreign exchange rate stabilizes. However, in November USD 3bn is pulled out of the country, of which USD 1.6bn on a single day (18 November).

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