Does the Mexican bank have a huge suitcase of dollar bills to sell? Or is it a credit line? Is it infinite?
Mexico’s number three source of revenue is money sent from the USA to family members in Mexico. For the average Mexican receiving these monies, wouldn’t this (the peso fall) be a good thing? As they would be receiving more pesos, no?
As always, thank you for your enlightenment and fighting my ignorance.
Presumably, the Mexican Central Bank carries a reserve of US Dollars (just like the US Fed carries reserves of foreign currencies) for situations just like this.
Buyers are people and institutions with pesos that are interested in having US $s. There are lots of reasons to want to hedge currencies or build up reserves.
They get more pesos, yes. However, all of the goods imported from the U.S. (and Mexico imports A LOT–around $250 billion a year) now cost more pesos. For example, Mexico is one of the larger export markets for U.S. agricultural products, including grains, milk and dairy, and pork and chicken meats. Those just got more expensive for Mexican consumers, so depending on what this average Mexican buys, they may get no actual benefit from having more pesos.
#1: It means there are more dollars on the market willing to buy pesos. Thus it drives up the demand for pesos on the foreign exchange market, while at the same time increasing the supply of dollars. This should drive up the price of pesos expressed in dollars.
Whoever buys them on the foreign exchange (forex) market. There is a very active, though delocalised (meaning that trading does usually not take place in a single physical exchange building but rather worldwide via electronic communication) market where currencies are being bought and sold. There are lots of players active on this market: Private banks, central banks, investment or hedge funds, private corporations needing foreign currency for whatever business they’re involved in…
Most central banks do hold foreign reserves, i.e., a stockpile of international currencies just for purposes like this. The U.S. dollar is the most important reserve currency in which central banks hold such reserves; other important reserve currencies include the euro, the pound sterling, the yen, or, more recently, the Chinese renminbi. In addition to holding foreign reserves, central banks sometimes give each other credit lines. There is, for instance, a standing swap facility between the U.S. Fed and the European Central Bank. This swap line means that each side agrees to sell its currency up to a specified limit to the other side with currency upon demand, at pre-agreed terms and subject to repayment later on. That way, the Fed could (if it needed it) draw euros from the European Central Bank and use them for interventions on the forex market when necessary.