Mexico Peso Heads for Biggest Fall Since Jan.: Latin Currencies

May 27 (<a href=quote.bloomberg.com>Bloomber) -- Mexico's peso was headed for its biggest decline in four months after yields fell to near record lows at today's government Treasury bill auction, prompting some international investors to sell pesos to seek higher returns for their dollars in other markets in the region.

The peso fell 1.8 percent to 10.4250 per dollar from 10.2423 yesterday at 4:15 p.m. New York time, its biggest one-day decline against the dollar since Jan. 21. Brazil's real reversed a plunge to trade little changed while other regional currencies declined.

Short term rates hit an all-time low of 4.90 percent two weeks ago, below the trailing 12-month inflation rate, making Mexican assets less attractive to overseas investors. Adding to the peso's decline, Mexico on Friday said its trade deficit widened in April from a year ago on declining exports, which account for a quarter of its $600 billion economy.

``The short term is getting very unappealing with yields at around 5 percent -- it's the very low interest rates,'' said Guillermo Estebanez, a currency strategist at Banc of America Securities Inc. in San Francisco.

Last week, traders reduced their long positions in peso future contracts to 20,812, after hitting an all-time high of 23,942 the week before. A high number means the peso may fall further if those contracts are unwound.

The long positions are a little lower, but still huge,'' said Estebanez. Anytime you're so long, you have the risk of a correction.''

The peso fell to a record low of 11.2644 on March and is the 10th-worst performer among the 59 currencies tracked by Bloomberg in 2003.

Brazil

Brazil's real pared declines to trade little changed after exporters took advantage of its 5.7 percent plunge against U.S. currency to sell overseas dollar earnings.

The real weakened 0.1 percent to 3.0280 per dollar, after extending yesterday's 3.8 percent decline by falling 1.9 percent to open trading today. The real has gained 17 percent against the dollar in 2003, the second-best performance of the currencies tracked by Bloomberg.

Investors sent the real into a tailspin yesterday that continued today after the central bank said it will end a commitment to refinance all dollar-indexed securities used to hedge currency risk when they mature. Once the real's losses over the two sessions neared 6 percent this morning, a number of exporters sold dollar-export earnings with the U.S. currency at its strongest level in three weeks, traders said.

We have an excess of dollars in the market because exporters' sales of the currency,'' said Joao Medeiros, a partner at currency broker Pioneer Corretora de Cambio SA. What we see is that in reality exporters are selling dollars above the 3-real level and aren't interested in anything lower than that.''

Policy Mix

The bank's decision may increase the demand for dollars and signal the government wants to stem the real's gains to safeguard export growth, which may contribute more than half of Brazil's 2003 expansion now forecast by the government at 2 percent. The policy shift also serves to highlight a growing divide within the administration of President Luiz Inacio Lula da Silva over the benefits and liabilities of the real's resurgence in 2003.

The real's strengthening against the dollar this year pits supporters of a stronger currency to slow inflation and the cost of servicing dollar-denominated debt against those who believe a weaker real will promote exports and growth.

Support for a stronger real follows its 35 percent decline against the dollar last year that sent the cost of imports soaring, fueling an acceleration of inflation to a seven-year high, which has only begun to slow under the weight of lending rates at a four-year high of 26.5 percent.

The stronger real and high interest rates have slowed a surge in Brazil's 12-month inflation rate to 16.8 percent that revived investor concern Brazil's roughly $350 billion in debt, about two- fifths of which is dollar-linked, might prove unsustainable.

Export Competitiveness

Against lower inflation and investor confidence, some exporters and members of Lula's government have argued that the government should work to strengthen the dollar to sustain a revival by the country's exporters dating to last year.

Exporters' overseas sales of automobiles, soybeans and other products increased as the real's decline against the dollar made their goods more competitive on overseas markets.

Increasing exports would also lessen the dependence of South America's largest economy on foreign investment. Brazil's exports make up about a sixth of its gross domestic product, compared with more than a quarter for Mexico and a third for Chile.

The central bank has done everything not to call it a floor, but there's no other way to interpret their decision,'' said Alexandre Vasarhelyi, head of currency trading at ING Bank NV's Sao Paulo office. This as an important signal that may trigger an increase in dollar-demand, because until yesterday the government's stance was always in favor of a strong currency.''

Brazil's benchmark 8 percent bond maturing in 2014 fell for the first session in a week, losing 0.63 cents on the dollar to 89.25 cents, according to J.P. Morgan Chase & Co. The yield rose to 10.66 percent.

Regional Currencies

Argentina's peso declined for the third day in four, losing 1.1 percent to 2.8650 per dollar from 2.8350 per dollar.

Chile's peso weakened for the first day in five, losing 0.8 percent to 710.65 per dollar, while Colombia's peso weakened for the sixth day in eight, shedding 0.3 percent to 2,866.30 per dollar.

Peru's new sol was little changed at 3.4920 per dollar. Venezuela fixed its bolivar at 1,598 per dollar earlier this year. Last Updated: May 27, 2003 16:16 EDT