Mexico's Peso Falls Amid Concern U.S. Bank Plan to Take Time

By Michael J. Moore

Oct. 14 (Bloomberg) -- Mexico's peso fell as investors shied from higher-yielding assets amid concern that a U.S. plan to shore up banks will take time to unfreeze global credit markets.

The peso declined 0.5 percent to 12.3134 per dollar at 5 p.m. New York time. It fell as much as 2.7 percent, reversing an earlier rise of as much as 3.6 percent. Today's loss, the second biggest in emerging markets, extends the peso's decline to 20 percent since it reached a six-year high on Aug. 4.

``There's still lower liquidity, and it's still risky,'' said Gerardo Margolis, vice president of emerging markets at TD Securities Inc. in Toronto. ``I don't think many investors are ready to jump in to the peso just yet.''

The peso surged 6.9 percent yesterday, the biggest one-day rally in 13 years, after a 14 percent tumble last week that pushed it to a record low. Mexico's central bank sold $8.9 billion of foreign reserves last week, including $6.4 billion on Oct. 10 alone, to stem the peso's rout. The sales pushed down the country's foreign reserves to a one-year low of $75 billion, the central bank said today.

Policy makers began selling dollars on Oct. 8 after the peso fell as much as 13.8 percent, the biggest intraday decline since the government abandoned a currency peg in December 1994.

The central bank also said Oct. 8 that it will offer $400 million per day at a rate 2 percent above the previous day's level in an attempt to limit the peso's slide. Investors haven't purchased any of the dollars this week.

Paulson's Plan

Treasury Secretary Henry Paulson announced a plan today to inject $250 billion into U.S. banks as part of an effort to stimulate lending and fend off a recession.

Paulson was forced to change tack from an initial plan to buy distressed assets from banks after the financial panic caused banks to hoard cash, sending money market rates to record levels. In its biggest effort yet to halt the 14-month credit rout, officials will also offer guarantees on new bank debts and start purchasing commercial paper in two weeks.

Higher-yielding, emerging-market currencies such as the peso have been hammered over the past month as investors pulled out of carry trades amid the worst financial crisis since the Great Depression. In the carry trade, investors fund themselves with low-cost loans in countries such as Japan and invest in countries with higher interest rates. Mexico's benchmark rate is 8.25 percent.

The peso has also plunged as oil, Mexico's biggest export, tumbled. Crude oil dropped 2.7 percent today to $78.98 a barrel in New York Mercantile Exchange trading, leaving it down 46 percent from a record high of $147.27 reached on July 11. Oil accounts for about 40 percent of the Mexican government's revenue.

Budget Bill

Mexican lawmakers drafted a bill for part of the 2009 budget that proposes the largest deficit since 1990. The income portion of the 2009 budget bill that the lower house finance committee approved today would leave the government with a deficit equal to 1.8 percent of gross domestic product.

President Felipe Calderon plans to boost public spending next year in order to create jobs and spur growth, buffering the economy against the global slowdown.

The yield on Mexico's benchmark 10 percent peso bonds due in 2024 rose 1 basis point, or 0.01 percentage point, to 8.91 percent. The bond's price fell 0.07 centavo to 109.27 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