Market News

By Marc Jones

LONDON (Reuters) - Mexico's peso fell for a fourth straight day and was close to its lowest level since mid-2022 on Tuesday after U.S. President Donald Trump's new 25% tariffs on imports from the United States' southern neighbour took effect.

Mexico's trade-dependent economy sends around 80% of its exports to the United States, and President Claudia Sheinbaum was expected to announce her response during a morning news conference in Mexico City later.

The peso was almost 1% weaker in European trading at 20.85 to the dollar, with key volatility gauges at their highest level in nearly a month.

The currency is now down 22% since last April, having been the main lightning rod of sentiment about 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 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% since Trump's election victory last November.

Mexico's stock market has fallen almost 5% over the last couple of weeks, although it is still 3% higher than it was before Trump's election.

Spanish banks Santander and BBVA, which both have Mexican lending arms, were down 5% and 5.8% respectively in European morning trading.

(Additional reporting by Jesus Aguado in Madrid; Editing by Kevin Liffey)