Mexican Peso Drops to One-Year Low on Economic Growth Concern

By Michael J. Moore

Oct. 2 (Bloomberg) -- Mexico's peso dropped to a one-year low against the U.S. dollar on concern a global economic slowdown will reduce demand for emerging-market assets.

``We're operating in an environment where investors are shifting their funds toward expecting a global recession,'' said Gerardo Margolis, a currency trader at TD Securities Inc. in Toronto. ``That's hurting all the high-yielding currencies and emerging-market currencies and equities.''

The peso fell 1.7 percent to 11.1254 per dollar at 10:20 a.m. New York time, from 10.9601 yesterday. It touched 11.1463, the weakest since Sept. 17, 2007, the day before the U.S. Federal Reserve began cutting its benchmark interest rate, which was 5.25 percent. It is currently 2 percent.

Mexico's economy may expand 2.5 percent next year, according to the average estimate of 33 economists surveyed by the central bank, which released its report yesterday. They previously forecast 2.9 percent.

Citigroup Inc. said yesterday that if the peso closes for the week beyond the 11.02-per-dollar resistance level, the bank would revise its target to 11.33 per dollar.

European Central Bank President Jean-Claude Trichet told reporters in Frankfurt today that financial-market turmoil is weakening economic growth, reducing the threat of inflation. Policy makers discussed lowering the benchmark interest rate from 4.25 percent before deciding to hold it steady.

Crude oil for November delivery fell as much as 3.5 percent in trading on the New York Mercantile Exchange as U.S. consumption dropped to the lowest since 2001. Mexico, the third- largest supplier of crude to the U.S., relies on oil for 40 percent of its federal budget.

Crude Oil

Petroleos Mexicanos, the state-owned oil company, said Sept. 22 that it extracted less than 1 million barrels a day from its largest field for a second consecutive month. Crude output fell 3 percent in August from a year earlier.

``Commodities like oil are lower, and that's also hurting the peso because in Mexico the production is already coming off every month as well,'' Margolis said.

The worst decline in the U.S. housing industry since the Great Depression is cutting remittances to Mexico from workers abroad, a Banco de Mexico report showed yesterday. Money transfers fell 12 percent in August from the same month a year earlier, the biggest decline since the central bank began tracking the data in 1995. Remittances are Mexico's second- biggest source of dollar flows after oil exports.

Yields on Mexico's 10 percent bond due in December 2024 rose 1 basis point, or 0.01 percentage point, to 8.41 percent. The bond's price fell 0.1 centavo to 114.37 centavos per peso, according to Banco Santander SA.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net