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USD/MXN inches down after Bank of Mexico completes first hike since 2008

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Investing.com -- USD/MXN fell mildly on Thursday as the Bank of Mexico lifted interest rates for the first time since 2008, in a move that was considered inevitable after the Federal Reserve abandoned its seven-year zero interest rate policy one day earlier.

The currency pair traded between 16.9172 and 17.1612 before settling at 17.0427, down 0.0047 or 0.03% on the session. In early-December, the Mexico peso fell to record-lows versus the dollar as the likelihood of a Fed rate hike became more apparent. The peso is down by approximately 15% against its American counterpart this year, as investors flocked to safer assets north of the border.

On Thursday, the Bank of Mexico increased its overnight interest rate by 25 basis points to 3.25%, moving it off record-lows for the first time since the Financial Crisis. For a 10-year period beginning in 2005, the rate averaged 5.5%, hitting an all-time high of 9.25% in October of that year.

Many analysts regarded the move as a necessity, as the nation faces severe headwinds from slow economic growth and declining inflation. In November, inflation in Mexico fell to a record-low of 2.21%, amid low gas prices and mobile phone rates. The Bank of Mexico slashed interest rates four times since the Financial Crisis to offset reduced inflationary pressures, the last coming 18 months ago.

Following the Fed's historic move on Wednesday, Mexico risked even sharper depreciations in the peso had it left rates unchanged. In a unanimous decision, the Federal Reserve, lifted its benchmark Fed Funds Rate on Wednesday by 25 basis points to a range between 0.25 and 0.50%. Nearly a decade had passed since the Fed last raised short-term rates.

"This should contribute to maintain confidence in Mexico, distinguishing it from other emerging countries, so that the sovereign risk component in interest rates, like other risk premiums remain low," the Mexico Central Bank said in a statement. "The latter is crucial to the current external environment in which financial conditions they are becoming more stringent."

Emerging Market activity throughout the world has slumped due primarily to an economic slowdown in China and declining basic materials prices, the Bank of Mexico added.

While the Fed could raise short-term rates by as much as 1% next year, the Bank of Mexico has not indicated if Thursday's hike could signal the beginning of a tightening cycle.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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