MEXICO CITY—Expectations that the U.S. Federal Reserve will raise interest rates soon has hurt currencies across emerging markets, from the Indian rupee to the Brazilian real. But for Mexico's central-bank chief, Agustin Carstens, the selloff in the peso is overdone.

"I think there has been an overreaction in the market," said the Bank of Mexico governor in an interview on Friday in his wood-paneled office in Mexico City. The peso has depreciated 16% against the U.S. dollar in the past year.

The peso, the world's most-traded emerging-market currency, has been trading at its weakest level since the financial crisis of 2009, and closed Friday in Mexico City trading at 15.29 to the dollar.

While higher returns in the U.S. make currencies elsewhere less attractive to investors, Mexico's central-bank chief says that misses a key point when it comes to Mexico: Higher rates in the U.S. mean the economy there is on more solid footing, which helps Mexican exports north of the border.

"Before, when there was good data in the U.S., the peso would appreciate because it led to expectations of greater consumption, greater income, more exports," Mr. Carstens said.

"Now, what happens is the market takes it as good news that will hasten the Fed liftoff, and so they speed up their portfolio adjustments, and the peso weakens. It doesn't make much sense," he added.

Mr. Carstens was confident that volatility related to the Fed's first interest-rate increase—which many investors believe could occur in September—will be temporary. Once the market adapts completely to the prospect of higher rates, the previous logic of what is good for the U.S. is good for Mexico should return, he said. "I think the peso has a chance to appreciate ahead."

The central-bank chief said he is "moderately optimistic" about the U.S. economy, despite weak growth during the first part of the year. He admits he is a bit mystified over why nonfinancial companies aren't investing more of their cash but said he thinks that will improve as the economy picks up.

Despite a sluggish Mexican economy, Mr. Carstens has ruled out any cut in domestic interest rates, which stand at a record low of 3%. "If we let inflation and the peso go adrift, that will result at the end of the day in much higher interest rates that would cost more to the Mexican economy," he said.

But at the same time, he said the bank was likely to wait to see any uptick in inflation expectations before making any move to raise interest rates ahead of the Fed. So far, he said there has been no pressure from demand on inflation, which stood around 2.9% in mid-May, close to the bank's permanent 3% target.

"We all agree that our main guideline should be inflation expectations," said Mr. Carstens. "If they start to be affected, and that happens before the Fed moves, we will act. That appears not be the case, and by postponing the raise, we are boosting the economy."

Mr. Carstens, named in February as chairman of the policy advisory committee of the International Monetary Fund, took the helm of the bank in early 2010, when the Mexican economy was rebounding after the financial crisis.

Seven years after the Great Recession, Mexican policy makers face another difficult environment: low oil prices, low growth and a weak peso. The recent drop in oil prices forced the Mexican government to cut $8.3 billion in spending to protect public finances. Oil accounts for a third of the federal budget.

"What's important here is that the Finance Ministry sticks to its promises" of budget cuts, Mr. Carstens said. "In the coming years, to obtain financing will be more difficult as markets will tighten."

Mr. Carstens praised the structural reforms driven by President Enrique Peña Nieto's government to end the state oil monopoly and increase competition in telecommunications. Particularly, the telecom overhaul has led to lower prices, he said.

But he said the key was implementation. "It's always more difficult to implement these things than one may think."

Mr. Carstens aspired to lead the IMF in 2011. Back then, he lost to then French Finance Minister Christine Lagarde. In 2016, both Mr. Carstens and Ms. Lagarde end their terms.

When asked if he wanted to continue or not as Bank of Mexico's governor, Mr. Carstens smiled: "One always wants many things."

Write to Juan Montes at juan.montes@wsj.com and Anthony Harrup at anthony.harrup@wsj.com

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