Mexican Peso Sinks to Record Low as Financial Crisis Spreads

By Michael J. Moore

Oct. 6 (Bloomberg) -- Mexico's peso plunged to a record low as the global financial crisis deepened, prompting investors to pull money out of higher-yielding, emerging- market assets.

The peso dropped 4.7 percent to 11.8050 per dollar at 5 p.m. New York time. The decline is the biggest since October 1997, when currency devaluations in Asia sparked outflows throughout emerging markets. The peso touched 11.9992 earlier today, the weakest since the government lopped three zeros off the currency in 1993 following years of runaway inflation.

``Markets are certainly in a fear mode,'' said Lawrence Goodman, head of global emerging-market currency strategy at Bank of America Corp. in New York. ``And typically in these type of environments, there is a clear overshoot.''

Currencies, stocks and bonds plummeted across emerging markets after the German government was forced to bail out Hypo Real Estate Holding AG, a sign the financial crisis that began in the U.S. is now deepening in Europe. The MSCI Emerging Markets Index slid 9.6 percent, the biggest loss since the index was created in 1987. The declines prompted stock exchanges in Brazil and Russia to halt trading. Brazil's real sank 6.2 percent while Columbia's peso slumped 3.8 percent.

Mexico's Bolsa stock index tumbled as much as 10 percent today while the yield on the benchmark government peso bond due in 2024 jumped 16 basis points to 8.57 percent. A basis point equals 0.01 percentage point.

`Almost Irrational Fear'

Demand for pesos also dried up as oil, Mexico's biggest export, fell 5.5 percent to $88.07 a barrel. Oil is down 40 percent from a record high reached on July 11, part of a rout in commodities fueled by concern that the financial crisis will throttle global economic growth. Oil accounts for about 40 percent of the government revenue in Mexico, the third-largest crude supplier to the U.S.

There is an ``almost irrational fear that has been driving the markets,'' said Edgar Camargo, a Bank of America Corp. economist in Mexico City. ``The U.S.'s deteriorating economic prospects are clouding Mexico's own prospects, but Mexican fundamentals remain relatively healthy.''

Economists cut their 2009 growth forecast for Mexico to 2.5 percent from 2.9 percent a month earlier, according to the average of 33 estimates in a central bank survey released Oct. 1. The U.S. is the biggest buyer of Mexican exports.

Morgan Stanley said today it expects the slowdown in the U.S. will hold growth in Mexico to zero next year. Morgan Stanley cut its 2009 economic growth forecast for Latin America to 1.5 percent from 3.5 percent on expectations of lower demand for the region's commodities.

Mexico's central bank will leave interest rates unchanged at 8.25 percent in October, according to the median forecast of economists in a survey released today by Citigroup Inc.'s Banamex unit. The gap between Mexican and U.S. benchmark rates is 6.25 percentage points, the biggest since 2005.

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