Authors: Noe Torres and Rodrigo Campos

MEXICO/NEW YORK (Reuters) – The Mexican peso hit its weakest level against the U.S. dollar in nearly two years but quickly recovered much of its losses, with the peso weakening recently on worries that the U.S. economy is headed toward recession as global trade unwinds.

The Mexican currency traded at 19.37 pesos to the dollar, down about 1.1% from Friday’s close. The overnight decline in foreign operations was as much as 4.4%, as the currency breached the psychological barrier of 20 pesos to the dollar, a level not seen since October 2022.

The peso was dragged down by a wave of liquidations in global markets, particularly in Asia. The Japanese yen rose to a seven-month high against the dollar as traders exited their carry trades, which was one factor that had supported the peso until recently.

This transaction involves investing in low-interest currencies, such as the yen, while simultaneously investing in higher-interest currencies, such as the peso, to maintain the interest rate differential.

“Like any domino effect, when panic sets in, everything moves towards safe-haven assets and out of risky assets like the Mexican peso,” said Gabriela Siller, director of research at local firm Banco Base.

Down about 1% on Monday, the Mexican currency has accumulated losses of 4% against the dollar since Wednesday’s close. The sell-off was sparked by data released last Thursday showing U.S. manufacturing activity fell to an eight-month low.

“There is simply too much uncertainty on both the U.S. and Mexican sides,” Michael Pfister, a currency analyst at Commerzbank (ETR:) , said in a note Monday, citing political uncertainty on both sides of the border as well as the possibility of a Mexican interest rate cut this week, even as inflation remains a concern.

“We can imagine the peso could appreciate a bit in the coming weeks and recoup some of last week’s losses,” he added, but by early next year “we see worse times ahead.”

A delicate U.S. jobs report released on Friday reinforced forecasts of a slowdown in the U.S. economy, with the unemployment rate rising to a near three-year high of 4.3% in July.

Mexico is extremely sensitive to the economic situation in the United States, its main trading partner and recipient of over 80% of its exports.