Mexico Peso Falls to Lowest Level in Decade; Inflation May Rise
By Andrew J. Barden
Mexico City, Jan. 21 (Bloomberg) -- Mexico's currency fell to its weakest level in a decade on concerns that a U.S. war with Iraq and slower U.S. growth will lower demand for Mexican goods and cut foreign direct investment.
Mexico's peso weakened 11 centavos, or 1.1 percent, to 10.75 pesos to the U.S. dollar as of 2 p.m. in New York. It's the weakest point since the currency began circulating on Jan. 1, 1993. The currency has dropped 3.5 percent this year.
``Mexico at this point is still primarily driven by what people think will happen in the U.S. and right now sentiment is weaker toward the U.S. because of the Iraq situation,'' said Ignacio Sosa, who helps manage $312 million in emerging market debt funds at OneWorld Investments LP In Boston.
A weakening currency may drive up import costs and push retailers to mark up prices, stoking inflation. Concerns about inflation will prompt the central bank to move to boost interest rates as early as Friday, said Felipe Illanes, a fixed-income strategist at Merrill Lynch and Co. in New York.
``The central bank feels that at the beginning of the year it's important to conduct policy so as to affect inflation expectations, which have been on the rise since the end of last year,'' Illanes said.
Mexico's central bank, which has already lowered its daily peso loans to banks by 75 million pesos ($7.0 million) this year to fight inflation, is slated to meet on Friday to set monetary policy.
Inflation Climbs
Inflation quickened for the first time in four years in 2002, ending the year at 5.7 percent, up from 4.4 percent in 2001 and higher than the central bank's 4.5 percent target.
Central bank Governor Guillermo Ortiz wants to ``reinforce the initial message that the central bank will pursue in a decisive manner this effort that it's trying to carry out to affect inflation expectations,'' Illanes said.
Mexico's benchmark 11.5 percent bond due 2026 fell 55 cents on the dollar to an offer price of 134.45, pushing the yield up to 8.17 percent. Mexico's bolsa stock market index fell 29 points to 6132.23.
Merrill Lynch lowered its estimate of 2003 growth for Latin America's biggest economy to 2.9 percent from the previous forecast of 3.4 percent. The government expects the economy will expand 3 percent this year. Merrill expects year-end inflation of 4.3 percent, more than the central bank's 3 percent target.
Mexico's peso may fall to as low as 11 pesos per U.S. dollar in the second quarter, just before Mexico's mid-term elections in July, Merrill Lynch said in a report.
President Vicente Fox's National Action Party must win more seats in Congress to push through changes in energy and tax collection policy that are needed to attract more foreign investment to the country, investors said. Fox is also trying to lower Mexico's dependence on revenue from oil, which now accounts for one-third of government revenue.
``We are concerned with the fact the Mexican presidency itself is a pretty weak institution and that President Fox has not been able to get through the kinds of reforms that we would have liked to have seen,'' Sosa said. ``How are they going to pass vitally needed reforms, unless one party dominates Congress and the presidency?''
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