Bank of Mexico Acts to Combat Fall of the Peso

The peso fell to its lowest level this year and Mexican stock prices tumbled Monday as investors, already nervous about Mexico’s currency, reacted to news that the government was scaling back plans to sell off parts of the state-run petrochemicals business.

Moving quickly Monday, the Bank of Mexico--the nation’s equivalent of the U.S. Federal Reserve--announced it will sop up money in circulation and tighten credit, restricting the amount of liquidity it issues to the banking system.

The stock market fell partly because of investor anticipation of such a move, which will mean higher interest rates as the government tries to stifle a possible rise in inflation. Tuesday’s weekly auction of treasury bills will signal what the market thinks. The Mexican Bolsa stock index fell 47.77 points Monday, ending at 3,287.38.

“The peso has everyone concerned,” said Esteban Rojas, a trader at the Arka brokerage. “We could see a serious rebound in interest rates.”

Higher borrowing costs hurt company earnings and the size of dividends paid shareholders, making fixed-income securities more attractive to many investors.

On Monday, the benchmark 48-hour peso closed a hefty 6 centavos weaker at 7.73/7.74 to the dollar--its weakest level since last December.

An adjustment of the peso “was more or less expected. . . . What worries me is the speed at which the peso is adjusting,” said a peso trader.

Economists said the peso is due for a correction after big gains against the dollar this year caused some to question whether it was again becoming overvalued--as it was before its spectacular December 1994 crash that rocked the Mexican economy and sent shudders through world financial markets.

Some exporters have been concerned about a declining trade surplus because of recent peso strength.