Mexican Peso Sep '26 (M6U26)

Description

A currency rate involves the price of the base currency (e.g., the dollar) quoted in terms of another currency (e.g., the yen) or in terms of a basket of currencies (e.g., the dollar index). The world's major currencies have traded under a floating exchange rate regime since the Bretton Woods international payments system broke down in 1971, when President Nixon ended the dollar's peg to gold. The two key factors affecting a currency's value are central bank monetary policy and the trade balance. An easy monetary policy (low interest rates) is bearish for a currency because the central bank is aggressively pumping new currency reserves into the market and because foreign investors are not attracted to the low-interest-rate returns available in the country. By contrast, a tight monetary policy (high interest rates) is bullish for a currency because it tightens the supply of new currency reserves and offers attractive interest rates to foreign investors.

The other key factor driving currency values is the nation's current account balance. A current account surplus is bullish for a currency because it implies net foreign demand for domestic currency (to pay for net exports). In contrast, a current account deficit is bearish for a currency because it implies net domestic demand for foreign currency (to pay for net imports). Currency values are also affected by economic growth and investment opportunities in the country. A country with a strong economy and lucrative investment opportunities will typically have a strong currency, as global companies and investors seek to invest in those opportunities. Futures on major currencies and cross-currency rates are traded primarily at the CME Group.

Dollar - The dollar index (Barchart.com symbol $DXY) rose in early 2025, reaching a 3-year high of 110.17 in January. Signs of strength in the US economy in early 2025 boosted T-note yields and supported the dollar. The 10-year T-note yield rose to a 2-year high of 4.80% in January, strengthening the dollar's interest rate differentials. However, the dollar was undercut by trade tensions after President Trump in February imposed 25% tariffs on goods from Canada and Mexico and a 10% tariff on Chinese goods. The dollar fell due to concerns about the negative impact of US tariffs on the US economy. The dollar was also undercut by investor concern about the Fed's independence after President Trump, in April, threatened to fire Fed Chair Powell and attempted to fire Fed Governor Cook in August. The dollar remained under pressure amid concern about rising deficits, after the Congressional Budget Office estimated that the Republicans' reconciliation bill, approved in July 2025, would add nearly $3.3 trillion to US budget deficits over 10 years. The dollar index then fell to a 4-year low of 96.22 in September after the FOMC cut interest rates by -25 bp at the September meeting and by another -50 bp by year's end. The dollar index finished 2025 down -9.4% yr/yr at 98.32.

Euro - EUR/USD (Barchart.com symbol ^EURUSD) opened 2025 on a weak note and tumbled to a 3-year low of $1.0141 in February. Trade tensions weighed on EUR/USD as President Trump's tariff policies threatened to undercut economic growth and possibly push the Eurozone economy into recession. Also, the European Central Bank (ECB) continued cutting interest rates in 2025, cutting rates by -25 bp at each of the policy meetings from January through June for a total of -100 bp of easing. EUR/USD then stabilized and strengthened for the remainder of the year as confidence in the dollar waned amid President Trump's aggressive trade tariffs, which prompted foreign investors to liquidate their dollar assets and move into euro assets. EUR/USD also found support amid central bank divergence, as the ECB completed its rate-cut cycle in June, while the Fed continued to cut interest rates into the end of 2025. EUR/USD rallied to a 4-1/2 year high of $1.1919 in September and finished 2025 up +13.4% yr/yr at $1.1732 per euro.

Yen - USD/JPY (Barchart.com symbol ^USDJPY) posted its high for 2025 of 158.87 in January. Higher T-note yields weighed on the yen in early 2025 as the 10-year T-note yield climbed to a 2-year high of 4.80% in January. However, the yen rallied after the Bank of Japan (BOJ) raised interest rates by +25 bp at the January policy meeting. The yen continued higher into Q2, as USD/JPY fell to a 1-1/2-year low of 139.89 in April, amid a lack of confidence in the dollar and safe-haven demand for the yen driven by US trade policies. The yen turned lower the rest of the year amid concerns that the LDP's loss of its majority in Japan's upper house in the July 20 elections may lead to fiscal deterioration in Japan's government finances. The yen found brief support after the BOJ raised interest rates by +25 bp at the December policy meeting, pushing the 10-year JGB yield to a 26-year high of 2.104%. USD/JPY finished 2025 down -0.3% yr/yr at 156.88 yen per dollar.

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