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The national currency of Mexico is the Mexican Peso; and Banco de Mexico is the nation’s central bank, issuing coin and paper money which is legal tender. Prices throughout the country are commonly shown with a dollar-sign ($) in front of the Peso amount; and although in some parts of the country businesses willingly accept U.S. dollars, it's almost always more advantageous (less expensive) for travelers to pay with Mexican Pesos. Likewise, certain people on the receiving end of your payment (e.g. waitstaff, bartenders, chambermaids, et cetera) generally prefer Mexican currency, to save them the inconvenience of a trip to the bank or a stop at a cambio on their day off. Remember there is a difference between the sell rate and the buy rate so your foreign currency tip will be worth less than intended.
Regarding the use of U.S. money (in Mexico), one should note that spending or exchanging bills which are torn, missing a corner, marred or scribbled on, and/or excessively worn is often difficult - and that many smaller businesses (including cab drivers) may be unwilling to accept anything larger than a twenty. This frequently applies to the use of Mexican paper money as well - so it's advisable to make a quick check of any bills you receive & be sure to carry a sufficient amount of smaller-denomination bills. [Be very stingy with your small-denomination Mexican paper currency! Always try to use larger bills first, as it's often difficult to find change when you need it. Don't get stuck trying to pay a 40-peso cab fare with a 200-peso bill - and a driver who says he doesn't have enough change.] Two other points worth mentioning: (a) U.S. coin-money has no value in Mexico and is not an acceptable form of payment anywhere, and (b) when paying with U.S. currency, any change you receive back will be in Mexican Pesos.
Because currency markets fluctuate daily, local banks - as well as money-exchanges (casas de cambio) - adjust their exchange rates accordingly. On-line currency converters can help travelers ballpark the Peso-value of their home-country's currency; but in reality, on-line rate-quotes are slightly higher than actual exchange rates available to travelers in Mexico. However, Automatic Teller Machines (ATMs) often provide the best possible exchange rate because they give you the official interbank rate. Check your bank for its fee schedule for international transactions.
For many years, the approximate exchange rate between Mexican Pesos and U.S. Dollars was consistently about 10:1 - and for most, it was fairly easy to make cost-conversions in the mind ... just by moving the decimal-point one place to the left or simply dividing by 10 (e.g. $100.00 Mexican Pesos was about $10.00 U.S. Dollars). In recent years, however, the Peso's value against the U.S. Dollar has slid; and the exchange rate, as of January/2010, still hovers around 13 - making it more profitable (less costly) for those travelers who take the time to exchange their U.S. Dollars for Pesos. As one might expect, some local businesses happily and readily accept U.S. Dollars - while still converting at 10:1 (thus giving themselves a healthy bonus). For the mathematically-inclined traveler, multiplying any Peso amount by 8, then dividing by 100, will approximate the U.S. Dollar cost - within a few cents. For example: $90 Mexican Pesos X 8 = 720, divided by 100 = $7.20 U.S. Dollars. At an exchange rate of 13:1, the actual cost would be $6.92 U.S. Dollars; at 12½:1, $7.20 would be the correct result.
On a related topic, it's also strongly advised that travelers call their bank(s) and/or credit-card companies prior to departure - to inform them of their impending travel plans. Failing to do so, some travelers may quickly learn that the use of their card(s) has been restricted or suspended - once charges from Mexico appear - to help protect them against fraud. One should also be aware that 'foreign currency transaction fees' and/or 'ATM withdrawal fees' may be incurred when using either type of card. It's best to ask your bank(s) and credit-card companies, in advance, about their fees (which usually range between 1%-3%, but could be higher) and make comparisons prior to traveling. FYI: Some banks which are affiliated with (or owned by) Mexican banks impose no 'ATM withdrawal fees', or a minimal charge (less than a dollar per transaction); but each has its own rules and regulations - and some may limit the number of foreign withdrawals before fees are imposed. Two examples of U.S. bank affiliations would be CitiBank with Banamex - and Bank of America with Santander. For Canadians Scotia Bank abd HSBC have Mexican affiliates.
For some additional clarification about ATM-cards versus debit-cards and which credit-cards are locally accepted, travelers might also benefit from the following. In simple terms, ATM-cards can ONLY be used for cash withdrawals from ATMs. They are not linked to VISA or MasterCard and cannot be used as a credit-card for purchases. Ergo, if one's ATM-card goes missing, it's useless - without the proper PIN - to anyone else. On the other hand, a bank debit-card (which serves a dual purpose and is common elsewhere but not for Canadians as yet) is usually tied to a major credit-card name as well as a personal checking or savings account - and can potentially be used for purchases by anyone who finds or steals it. Should this occur, a traveler may run the risk of having his/her bank account emptied out - with no recourse for recouping those funds. It is therefore 'best' NOT to travel to Mexico with your bank 'debit-card'. Canadians will need to learn that the terminology of debit-cards and ATM cards differs from the USA terminology. As for paying with major credit-cards in Mexico, most business establishments accept either VISA or MasterCard - and some (though fewer) will honor American Express. Discover hasn't yet become an acceptable card; and don't expect to be able to use your foreign WalMart credit-card either. Keep in mind, too, that although the majority of businesses will accept plastic payments, certain local restaurants, many smaller stores and eateries, taquerias, cabs and buses, and most private drivers and tour-guides take 'cash only'. Places which don't take credit-cards, especially restaurants, often post a sign which reads 'Lo Sentimos - No Tarjetas de Crédito' (Sorry - No Credit Cards) or have it printed on their menus; but it's always best to inquire.
The use of Travelers Cheques may have waned over the years, but some folks still 'don't leave home without 'em'. While some local businesses continue to honor them, it can be hit-or-miss. For those who prefer to carry Travelers Cheques, it's probably best to cash and exchange them at your hotel whenever possible - on an as-needed basis.
Other precautions regarding ATM-, debit-, and credit-cards - which some travelers heed - is to (a) make a photostat copy of your cards, front and back, and (b) obtain and record corresponding 'direct-contact' telephone numbers for the card-companies ... in the event that your card(s) are lost or stolen. Store this information with your passport - in a locked luggage compartment or hotel safe. FYI: Most toll-free company phone-numbers which you'd normally dial from home cannot be accessed from Mexico - and you should therefore request special contact numbers. Alternately, some travelers prefer to email a copy of this information to themselves, making it more easily accessible from wherever they may happen to be.
The current Mexican-Peso coins and notes in circulation are as depicted below: