Mexico's Currency Rises After Fed Agrees to Provide $30 Billion

By Valerie Rota

Oct. 29 (Bloomberg) -- Mexico's peso rallied after the U.S. Federal Reserve said it agreed to provide the Mexican central bank with $30 billion to boost liquidity amid the worst global financial crisis since the Great Depression.

The peso gained as much as 2.1 percent after the Fed said it authorized temporary swap lines with the central banks of Mexico, Brazil, South Korea and Singapore to increase the supply of dollars in emerging markets. The announcement comes as the International Monetary Fund works on a separate program to provide emergency credit to emerging markets.

``What we are seeing is that there is enough liquidity provided by either the IMF or the Fed for countries that may be facing liquidity shortages in the near term,'' said Alonso Cervera, a Latin America economist with Credit Suisse Group AG in New York. ``That is obviously boosting the Mexican peso.''

The peso advanced 1 percent to 12.9119 per U.S. dollar at 5 p.m. New York time, from 13.0405 yesterday. Its gain today pares its decline this month to 15 percent.

The swap lines will be in place through April 30 and the resources from the agreement will be available for Banco de Mexico to provide liquidity to financial institutions in the country, the Mexican central bank said today. The bank said that it doesn't need to use the facility now.

The IMF today approved an emergency loan program that almost doubles borrowing limits for emerging market countries in a bid to prevent the collapse of developing nations struggling to access international capital markets.

`Volatile Backdrop'

Mexico's peso fell earlier after the Fed, in a statement announcing it cut its key lending rate by a half percentage point to 1 percent, said ``downside risks to growth remain'' in the world's largest economy.

``The peso is going to keep being affected by this volatile backdrop,'' said Rafael Camarena, an economist in Mexico City at Banco Santander SA. ``Its very subject to economic data that comes out.''

Mexico's central bank today cut its economic growth forecast for a fourth time this year. Mexico's economy will expand about 2 percent in 2008, central bank Governor Guillermo Ortiz said today during the release of Banco de Mexico's quarterly inflation report. The bank in July lowered its 2008 growth forecast to between 2.25 percent and 2.75 percent from a previous forecast of 2.4 percent and 2.9 percent.

`Right Decisions'

Mexican bonds advanced for a third day, buoyed by a government plan to pare back sales of longer-term securities this quarter.

The plan to cut back sales of bonds maturing in 10-, 20- and 30-years while boosting auctions of bills maturing in a year or less came after yields on Mexico's benchmark security due in 2024 jumped to a 3 1/2-year high and yields on the one-month bill fell to their lowest in a year.

``The Mexican authorities have made the right decisions,'' said Alberto Bernal, an emerging markets strategist for Bulltick Capital Markets in Miami. ``This is what the market wanted.''

Yields on Mexico's 10 percent bond due December 2024 fell 22 basis points, or 0.22 percentage point, to 9.15 percent. It has fallen 2.25 percentage points in three days. The bond's price today rose 1.95 centavo to 107.11 centavos per peso, according to Santander.

The difference in yields between Mexico's benchmark bond and its one-month bill narrowed to 1.44 percentage points today from 4.27 percentage points on Oct. 24, when it touched its widest ever.

To contact the reporter on this story: Valerie Rota in Mexico City at vrota1@bloomberg.net.