The Mexican Peso is the official currency however, most merchants will take US dollars (but sometimes at an exchange rate that favors them; the most common is to exchange at 12 pesos to the dollar).
The current exchange rate is approximately 13.5 pesos per US dollar (click here for an update).
We usually pay by credit card and let the issuer handle the conversion. Beware of vendors that quote in dollars but charge your credit card in Pesos — the vendor may convert the transaction at an unfavorable rate and then your credit card will charge to convert in addition. Best to just get quoted in Pesos — in fact, insist on it.
If you’re heading to Cabo from Canada (and taking advantage of the strength of the Canadian Dollar!), you’ll probably need to convert to US Dollars or Pesos, or risk getting vendor conversion rates based on the “old” rate. That may change in time.