Reuters: US Dollar Report: EMERGING MARKETS-Mexican peso leads Latin American forex rally

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EMERGING MARKETS-Mexican peso leads Latin American forex rally Apr 27th 2012, 18:57 Fri Apr 27, 2012 2:57pm EDT * Mexico's central bank holds rates, supports peso rally * Mexican peso strengthen as much as 1.9 percent * Chilean peso up on copper, weaker dollar abroad By Rachel Uranga and Alonso Soto MEXICO CITY/BRASILIA, April 27 (Reuters) - The Mexican peso rallied on Friday after the central bank held its benchmark interest rate steady, giving Mexican assets additional allure after heavy bets the bank would lower borrowing costs. Banco de Mexico left its key rate at 4.5 percent, where it has been since mid-2009. Economists expected the bank to hold steady but the market had bet on at least a 25-basis-point cut in the coming months. The peso surged after the central bank decision, gaining 1.90 percent to 12.9720 per dollar. The currency is on track to post its biggest one-day gain since Jan. 3. Yields on short-term interest rates swap contracts spiked as investors dumped bets that fully priced in a cut in coming months. "The market is pricing in that the central bank is not going to lower interest rates, making it more attractive to foreign investors. This is what brought on the strengthening of the peso and it's going to continue," said Federico Flores at financial group Invex in Mexico City. A cut in interest rates usually curbs returns for investors chasing higher profits in emerging-market assets. The Mexican peso, until recently considered one of the most undervalued currencies in Latin America, could continue strengthening in coming months as further stimulus in the United States could drive investors to the country. Alfredo Puig, a trader at Vector, said that he expects the peso could go to as much as 12.8 but there remains risk from Europe. "We think that the strengthening trend could well return but if there's more bad news in Europe those gains could be taken away," Puig said. The rest of Latin American currencies also strengthened after slower-than-expected economic growth in the United States raised the possibility of further stimulus that would drag down the dollar. The Brazilian real, however, remained stable as constant government threats of more intervention and the specter of another central bank rate cut has kept downward pressure on the currency. "The real remains stable because of the threat of more intervention by the central bank and the government," said Reginaldo Galhardo, exchange trade manager at Treviso Corretora in Sao Paulo. The real strengthened 0.08 percent to trade at 1.8838 per dollar on Friday afternoon. The Brazilian government has succeeded in weakening the real this year after slapping taxes on foreigners investing in local debt and raising duties on international borrowing. Chile's peso ended at an over two-week high as prices for top export copper rose to their strongest in three weeks on tight supplies outside China and as the euro firmed versus the greenback on downbeat U.S. economic data. The peso finished 0.37 percent stronger, firming for the fourth day in a row to bid at 483.20 per dollar. Link this Share this Digg this Email Reprints

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