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By Rodrigo Campos and Marc Jones
NEW YORK/LONDON (Reuters) -Mexico's peso rose against the dollar in a volatile session on Tuesday, as traders priced the effect of newly imposed U.S. tariffs of 25% on imports from Mexico.
The peso strengthened late in the session after U.S. Commerce Secretary Howard Lutnick told Fox Business that President Donald Trump will reach a middle ground with Canada and Mexico on tariffs and an announcement to that effect was expected on Wednesday.
Mexico's trade-dependent economy sends around 80% of its exports to the United States. President Claudia Sheinbaum said some Mexican agricultural exports like avocados could find other destinations, adding she would announce Mexico's full response on Sunday.
Investors rightly recognize that imposing 25% tariffs on Mexico and Canada would be an act of economic self-sabotage for the U.S. according to Alejo Czerwonko, chief investment officer for emerging markets in the Americas at UBS Global Wealth Management.
"Sheinbaum has been skilfully managing U.S. pressures," he added.
Mexican stocks also staged a comeback, with the local benchmark up 0.6% on the day after earlier touching its lowest in five weeks. At its session low, the index fell over 2% while the bounce back took it to a 1.2% gain.
The peso fell as much as 1.5% on the day to 21.002 per dollar, the weakest since a tariff-related selloff in early February. But the afternoon rally brought the currency back to positive territory and it ended the day up 0.48% at 20.586 per dollar.
The greenback fell across the board as investors weighed the dollar support from tariffs against the economic impact in the U.S., where stocks and bond yields also fell.
JPMorgan analysts said Tuesday they continue to believe tariffs will be temporary, with an immediate price reaction on the peso in a range from 2% stronger to 4% weaker.
The currency has lost a fifth of its value to the dollar since last April, having been hit with both concerns over U.S. trade and domestic political and constitutional changes.
(Reporting by Marc Jones and Rodrigo Campos; editing by Kevin Liffey, Mark Heinrich and Sam Holmes)
