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 Business News | July 2005 
Peso Strengthens Against Dollar
 Adriana Arai - Bloomberg News
Mexico's peso rose to the strongest level against the dollar since August 2003 as 12 central bank interest rate increases in 16 months attract rising levels of international investment.
Banco de Mexico last week held the overnight rate at a twoyear high of 9.75 percent for a third month, still a twofold increase over the 4.87 percent rate of Feb. 1, 2004, and three times as high as the comparable U.S. rate.
"The central bank tightened monetary policy aggressively in the past year and that made Mexico very attractive to investors looking for high yield," said Claire Dissaux, an emerging market currency strategist with Caylon, the securities unit of Credit Agricole SA, in Paris.
The peso rose 0.2 percent to 10.7273 per dollar at 3:49 p.m. New York time from 10.7490 late yesterday, boosting its gain in 2005 to 3.9 percent, the secondbest performance against the dollar of the 16 major currencies after Brazil's real. It's the best performer today and the second best this week.
The difference in yield between Mexico's 10-year, 9 1/2 percent peso-denominated treasury note that matures December 2014 and the U.S. 10-year Treasury note that matures a month earlier has narrowed 1.16 percentage points since May 2 from 6.5 percentage points to 5.34 percentage points today.
Earlier, the peso rose as much as 0.4 percent to 10.7113 per dollar, its strongest since trading at 10.6863 per dollar on Aug. 18, 2003.
OUTLOOK
Dissaux said the peso probably will weaken from here because the central bank said last week it was done raising interest rates, reducing the attractiveness of the peso yield relative to the U.S. dollar.
Caylon forecasts the peso at 11.70 per dollar in the next 12 months.
Mexican central bankers on June 24 dropped from their monthly policy statement a sentence that said the country's rates should follow rising U.S. rates, signaling they're done raising the benchmark loan rate.
The bank's five-member board left the benchmark overnight rate unchanged and removed from their statement a sentence they had included since June 2004: "The board expects that domestic monetary conditions will continue to at least reflect increased tightening" in the U.S.
Mexican consumer prices fell in the first half of June, the central bank said last week, building on speculation that the bank will begin lowering rates soon after core inflation fell to a record in May. The central bank targets an annual inflation rate of 3 percent.
On the Chicago Mercantile Exchange, the peso future contract for September delivery rose 0.25 percent to 9.1925 cents from 9.1700 cents yesterday. |
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