Congress’s bipartisan vote last week to increase spending by nearly $300 billion over the next two years comes on the heels of a $1.5 trillion tax cut that could boost domestic demand and the country’s trade gap. These deficits are the reason for the weakness in the dollar. With the U.S.’s combined fiscal and current-account deficit once again approaching 6 percent of the gross domestic product, the long-term outlook for the dollar is bleak.

What does this all mean for the Mexican peso? Technically it doesn’t look good for those of us who hold US dollars in Mexico, its purchasing power is diminishing.

At the bottom of the chart, you’ll notice some circled crossover points. These are times when you see the increased potential of a decline in the purchasing power of the US dollar. In the past two crossovers, we see that the dollar was coming off a significant rally. The rally that we just recently had was anemic and the chances of breaking support at 18.30 peso to the dollar are high. While the dollar is rallying against the peso this morning, the odds of breaking that support point have increased.  We could see a move down to 17.5.

Mexico still has some economic issues, with inflation and NAFTA that may help to offset the dollar’s decline. Some say that the dollar is still 10% overvalued and that would translate into a move back to the 17 level. Just advising as to a potential move downward!

It is possible that the dollar has bottomed, but I wouldn’t count on it.

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