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Mexico's Peso Posts 6 Pct Gain in 2010
email this pageprint this pageemail usMichael O'Boyle - Reuters
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January 02, 2011



Mexico City - Mexico's peso firmed on Friday as the currency notched a 6 percent gain for the year, boosted by a strong recovery in exports to top trading partner the United States.

The peso firmed 0.29 percent to 12.36 per U.S. dollar on Friday. Local markets in other major economies were closed for the New Year's eve holiday.

Some analysts are skeptical that the Mexican currency will be able to match its solid gains seen this year in 2011.

"Investors should not extrapolate the Mexican peso's outperformance in 2010 to 2011," said Jimena Zuniga, an analyst at Barclays Capital in New York.

Stronger than expected data and the extension of tax cuts in the United States pushed some analysts to revise up their forecasts for U.S. growth in 2010, but Zuniga points out that Mexico's economy will see slower growth next year compared to 2010, when it likely grew around 5 percent.

"Both the U.S. and Mexican economies had a lot of slack in 2010 to support growth, but the slack has diminished a lot in Mexico even if not so much in the United States," Zuniga said.

Low interest rates in major economies, which are trying to spur growth and underpin a recovery from the 2008 financial crisis, spurred high demand for Latin American debt and currencies in 2010, helping drive solid gains across the region.

While yield-hungry investors starved by low U.S. rates will likely continue to pile into Latin American assets early in 2010, some analysts believe faster than expected growth in the United States could awaken expectations of a rate hike by the U.S. Federal Reserve toward the end of 2011.

"This could deter flow from foreign investors toward emerging markets, and we could even see outflows," wrote analysts at Santander, which expects the Mexican peso to weaken more than 2 percent to 12.70 per dollar by the end of 2011.

Other currencies in the region could also see gains crimped by increasing intervention by officials who are concerned that strong currencies are hurting local exporters and that foreign flows could be inflating bubbles in the region's assets.

Brazil and Colombia have mounted significant dollar buying programs by their central banks to contain gains in their currencies, while Chile could soon join the fray if its peso gains much more ground, said Barclays' Zuniga.

"We envision more of this type of war between flows that are attracted to the market's fundamentals and the policy response by authorities," said Barclays' Zuniga.

(Editing by James Dalgleish)




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