American Investment into Mexico - Essay Example

Secondly, this survey will discuss the possibility of the Mexican Peso being strong as a result of anticipated better performance of the Mexican economy relative to the American economy in the future.

There is little question that under present economic circumstances the dollar and peso exchange rate is in a constant state of flux because these two currencies are allowed to float freely against one another and may experience changes resulting from market conditions. However, it should be noted that at one point in these nations’ histories, the Peso was pegged to the Dollar. Under this fixed exchange rate regime there was effectively no risk associated with any appreciation or depreciation as the M$ was set at a fixed rate to the US$. However, it was the case that there was significant inflation in Mexico in the early 90’s so a crawling peg system emerged which meant that the peso needed to be devaluated, and as such the M$-US$ exchange rate would occasionally be altered by the central bank. However, since Mexico’s introduction into NAFTA, the currency has been free to float at its market value exchange rate with the United States.

At Natural Detergent it has been argued by some senior executives that the relative value of the Peso would decline against the Dollar because the United States has a long history of outperforming the Mexican economy. Implicit in this statement is that the American economy has always outperformed the Mexican Economy and secondly a better-performing economy has a stronger currency. According to the World Bank World Development Indicators (2009), the real annual growth rates for Mexico and the United States from 1997-2009 are available in Appendix #1, however, the Mexican economy outpaced the growth of the American economy eight out of the last thirteen years. However according to MSN Money (2010) during the same period, the Mexican peso has more or less declined in value against the U.S. Dollar at the same period even jumping to approximately M$15-US$1 in 2009 from approximately M$10-US$1 in 1998. It seems that other factors are at play that influence the exchange rate of the Mexican peso than simply outperforming the U.S. Economy.

Next, it was postulated that the Mexican economy was poised to perform better than the American economy in future years. According to Fontana (2010), it is the case that the Mexican economy is expected to outperform the American economy in the coming years however as demonstrated in the previous argument, having an economy that outperforms the U.S. does not necessarily mean that the peso is, however, it is the case that the peso in the past was depreciating against the dollar even though its economy was outperforming that of the United States. From this perspective, it could be argued that some other factor will likely influence the performance of the peso other than outpacing growth over the United States.