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Mexico's Peso Rises Most in 2 Weeks on Bet Yield Spread to Grow

Monday, August 25, 2008 Bloomberg :
Mexico's peso rose the most in almost two weeks on speculation the yield difference between Mexican and U.S. benchmark lending rates will grow.

The peso led gains among Latin American currencies today. It has risen 7.8 percent this year, touching a six-year high on Aug. 4, as three interest-rate increases by Mexico's central bank have widened the gap between Mexican and U.S. borrowing costs to 6.25 percentage points, the biggest since 2005.

Investors ``are expecting another quarter-percentage-point rate increase,'' said Omar Martin del Campo , head currency trader at Casa de Bolsa Arka SA in Mexico City. This doesn't signal ``a change in trend for the peso.''

The peso rose 0.4 percent to 10.1089 per dollar at 10:06 a.m. New York time, compared with 10.145 on Aug. 22. It earlier rose as much as 0.6 percent, its biggest gain since Aug. 12.

Banco de Mexico raised its benchmark lending rate by a quarter-point to 8.25 percent on Aug. 15. It was the third increase since June, pushing borrowing costs to the highest since January 2006. Central bankers next meet on Sept. 19.

Interest-rate futures show traders see a 81 percent chance the U.S. Federal Reserve will keep the 2 percent target rate for overnight lending between banks unchanged through December.

Speculation that Banco de Mexico's interest-rate increases will keep inflation in check has buoyed demand for Mexican fixed-income securities, Martin del Campo said.

Yields on Mexico's 10 percent bond due in December 2024, the country's most-traded security, fell 2 basis points, or 0.02 percentage point, to 8.54 percent. The yield fell to the lowest since June 6. The bond's price rose 0.2 centavo to 112.77 centavos per peso, according to Banco Santander SA.

Author:
Valerie Rota
United States
vrota1@bloomberg.net