The interest rates on U.S. dollar–denominated bank accounts in Mexican banks are often higher than the interest rates on bank accounts in the United States. Can you explain this phenomenon?

What will be an ideal response?

Mexico has periodically gotten into balance of payments difficulties and suffered severe depreciations of the peso. During these periods of crisis, the Mexican government converted dollar-denominated bank deposits into peso-denominated accounts at exchange rates that were unfavorable to the depositor, effectively expropriating some of an investor's principal. If there is a possibility of this type of risk or just higher default risk by the Mexican banks than at U.S. banks, the higher dollar-denominated Mexican deposit rates would be required to induce depositors to invest in Mexican banks.