Peso Volatility Amidst Middle East Tensions and Shifting Central Bank Policies
Currency markets experienced significant fluctuations on Thursday, March 19, 2026, as the Mexican peso reacted to escalating geopolitical tensions in the Middle East and evolving monetary policies from global central banks. The peso initially strengthened before reversing course, mirroring a broader trend of risk aversion and safe-haven demand for the US dollar.
Peso’s Initial Strength and Subsequent Reversal
The USD/MXN exchange rate reached an intraday high before closing at 913.9 on Bloomberg screens, a drop of 4 points. This movement coincided with a decline in the dollar index, which fell 0.7% due to the recovery of currencies like the euro (1.2%), the Japanese yen (1.4%), and the pound sterling (1.3%).
Geopolitical Factors and Oil Prices
The volatility was largely driven by attacks on energy infrastructure in the Persian Gulf. Iran attacked a liquefied natural gas (LNG) plant in Qatar, following an Israeli strike on the Iranian South Pars gas field, the world’s largest. Brent oil prices stabilized at $108 per barrel, reaching levels not seen since mid-2022. Former US President Donald Trump advised against further attacks and temporarily suspended the Jones Act to reduce US transportation costs.
Central Bank Responses and Rate Expectations
The European Central Bank (ECB) and the Bank of England (BoE) signaled a hawkish stance, verbally committing to address modern inflationary risks. Money markets are pricing in a greater than 60% probability of a rate hike at the ECB’s next meeting, and around a 50% chance for the BoE. The Bank of Japan is also expected to raise rates, with over a 60% probability factored into market expectations. In contrast, the US Federal Reserve is expected to hold rates steady this year, with potential cumulative cuts anticipated between now and the end of 2027.
Impact on Copper and Investor Sentiment
Comex copper fell 1.9% to $5.49 per pound, hitting a new year-to-date low, reflecting weaker demand. Rising inventories on the London Metal Exchange, reaching their highest level in over six years, contributed to the decline. The Chilean peso, particularly sensitive to copper prices, has been among the most affected currencies in Latin America. Increased volatility and implied volatility have also impacted non-resident investor flows, suggesting a higher premium is being demanded to maintain exposure to the peso.
Expert Analysis
Fernando Slebe, an investment manager at Patrimore, noted that the dollar index is falling due to moderating inflationary expectations and the potential for a quicker de-escalation of the conflict. Mauricio Guzmán, head of Investment Strategy at Sura Investments, highlighted the increased volatility following the conflict and the peso’s vulnerability due to a lower carry relative to other regional currencies and competition from developed economies offering higher rates. Marcela Calisto, an economist at BICE Inversiones, emphasized the role of falling copper prices in putting upward pressure on the exchange rate.
Looking Ahead
The peso’s future performance will likely depend on the evolution of the geopolitical situation in the Middle East, the actions of major central banks, and global commodity prices. Continued escalation of the conflict could lead to sustained upward pressure on the USD/MXN exchange rate, while a de-escalation could provide some relief.