The Israel-Iran conflict has plunged the peso; why should you care?

The military escalation between Israel and Iran has sent shockwaves through global markets, and Mexico is no exception. The peso is depreciating and the stock market is falling as investors flee to safe havens. We explain, bluntly, how this crisis directly affects you.

A conflict erupting more than 12,000 kilometers away may seem like a distant affair, but its effects are already hitting the Mexican economy and, by extension, the pockets of millions of citizens. The dramatic escalation of attacks between Israel and Iran has unleashed a wave of panic in global financial markets, causing the Mexican peso to plummet against the dollar and a decline in the Mexican Stock Exchange (BMV).

The market reaction to the news of the attacks was immediate and negative. The Mexican peso, one of the most traded emerging currencies in the world and often used as a barometer of global risk, lost significant ground. During the day, the exchange rate reached a high of 19.10 per dollar, eventually closing the session with a moderate loss at around 18.93.

Meanwhile, the Mexican Stock Exchange's main index, the S&P/BMV IPC, registered a 0.81% drop, reflecting the outflow of capital from investors seeking to reduce their exposure to assets considered riskier.

To understand why a conflict in the Middle East weakens the peso, it's crucial to understand a key concept: "risk aversion." When a geopolitical crisis of this magnitude erupts, investors around the world feel fear and uncertainty. Their instinctive reaction is to sell assets in emerging countries like Mexico (considered more volatile) and buy "safe haven" assets. The main refuge, historically, is the US dollar.

This phenomenon creates a domino effect that directly impacts your wallet:

• Step 1: Conflict in the Middle East. Israel and Iran attack each other directly.
• Step 2: Fear in the Markets. Global investors are panicking and seeking security for their money.
• Step 3: The Dollar Strengthens. Everyone rushes to buy dollars, which increases their value due to high demand.
• Step 4: The Mexican Peso Loses Value. As the dollar's value increases, more pesos are needed to buy a single dollar.
• Step 5: Impact on Your Pocket. Many products you consume in Mexico (from technology and clothing to industrial components and food) are imported and paid for in dollars. As the peso weakens, these products become more expensive for you. Your money, in essence, goes further.

At the same time, the conflict has caused international oil prices to skyrocket. West Texas Intermediate (WTI) crude oil rose more than 6% in a single day, surpassing $71 per barrel. The reason is simple: the Middle East is a vital region for global oil production, and a large-scale war could severely disrupt supply.

Although Mexico is an oil-producing country, gasoline prices in the domestic market are linked to international prices. A sustained increase in crude oil prices will inevitably translate into higher prices at the pump, affecting transportation costs and, consequently, the price of almost all products and services.

"Investors' immediate reaction was to seek protection. The dollar rose sharply against major currencies, returning to levels of 19.10 at times," explained Miguel Angel Elizondo, analyst at Capitaria.

Financial analysts point out that volatility will continue as long as geopolitical tension persists. Investors will closely monitor the development of the conflict and its effects on oil prices. Furthermore, attention will be focused on the next monetary policy announcement by the United States Federal Reserve, which could add another factor of pressure or relief to the Mexican peso.