Of course, this fixed exchange rate is not static. The Mexican central bank will continuously adjust it as the market changes, within the range agreed upon with the United States.
At the beginning of 1994, 1 US dollar could be exchanged for 3.106 pesos. By March, the exchange rate had changed to 1:3.28. The main reason for this was the continuous increase in trade between the two sides.
Through these continuous, small-scale adjustments, by December 1, 1994, one Mexican peso could be exchanged for 0.5 US dollars.
The market price is $0.00 for buying and $0.00 for selling.
If the official quote differs too much from the market price, the Mexican central bank will intervene to keep the exchange rate at a normal level.
During this period, Mexico's inflation rate was higher than that of the United States, and its pegged system artificially stabilized the exchange rate, causing the peso to be overvalued, which weakened Mexico's export competitiveness and resulted in a current account deficit.
When faced with a current account deficit, Mexico can only maintain its balance of payments by attracting large inflows of foreign capital, especially short-term capital.
This situation further increases the vulnerability of Mexico's economy and currency. Any changes in its domestic and international political and economic situation could reverse capital flows, leading to the depletion of foreign exchange reserves and the devaluation of the peso.
Coincidentally, 1994 was an election year in Mexico, which saw social unrest. At the same time, the US economy experienced a strong recovery that year, and the US Federal Reserve raised interest rates repeatedly.
These factors combined have led to a capital outflow from international financial markets, further exacerbating the existing pressure on the peso to depreciate.
In order to maintain exchange rate stability, the Mexican central bank has had to use its foreign exchange reserves to intervene. With its foreign exchange reserves depleted and intervention proving ineffective, the Mexican government will be forced to announce a devaluation of the peso.
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