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08-01-2008, 10:41 PM
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Mexico's peso gained ground on Friday
Mexico's peso gained ground Friday, reaching its strongest level in nearly six years and moving below MXN10 to the U.S. dollar for the first time since October 2002 amid expectations the Bank of Mexico could continue to raise interest rates.
The peso was quoted in Mexico City closing at MXN9.9535 to the dollar, compared with MXN10.0120 at the opening and MXN10.0355 at Thursday's close. It was the peso's strongest close since Oct. 23, 2002. The currency's rise this year has been largely attributed to the widening of yield spreads, as U.S. interest rates have been kept low to counter economic weakness and the Bank of Mexico has raised rates to keep inflation expectations in check. The central bank raised the overnight rate by 25 basis points in June and again in July, bringing the rate to 8%. The U.S. federal funds rate target is 2%, and Friday's July employment report did nothing to create expectations of a rate hike next week by the Federal Reserve. In Mexico, meanwhile, expectations are for higher inflation and higher interest rates after the Bank of Mexico this week raised its inflation forecasts for the next two years. The peso had backed away from the key MXN10 level a week ago when the central bank said it would suspend its daily dollar sales beginning this month. The central bank was to have sold $40 million a day in the exchange market from Aug. 1-Oct. 31 under the mechanism designed to curtail the growth in foreign reserves. The decision to suspend the sales after the federal government bought $8 billion in central bank reserves was widely seen as a signal to the market that neither the central bank nor the government was keen to see the exchange rate move below MXN10. In an interview Thursday on Mexico's radio Formula, Bank of Mexico Governor Guillermo Ortiz said that, more than a strengthening of the peso, what is happening is a weakening of the dollar against practically all currencies, including the peso. But too strong a peso isn't convenient for the country because it affects competitiveness, Ortiz added. The peso's crossing back into single digits against the dollar Friday came the same day that the central bank halted its dollar sales, which were introduced in 2003. The last time the central bank had a mechanism in place that tended to contain peso appreciation was in 2001, and that was also related to the management of foreign reserves. In August 1996 the bank began the monthly sale of dollar options under which market participants could sell dollars to the central bank when the exchange rate was below the moving average of the previous 20 days. The central bank suspended the options in 2001 after buying $12.12 billion under the system, when foreign reserves had reached $40.7 billion. Foreign reserves were a record $86.9 billion before last week's sale of $8 billion to the federal government.      
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