Mexican Peso Ends Week Near 15-Month Low

Mexican authorities managed to calm the frazzled currency market Friday after a sharp plunge in the value of the peso this week, which was set off by concerns of possible political turmoil surrounding the July 2 presidential election.

The peso strengthened somewhat Friday, closing at 9.89 to the dollar, but it still stood near its weakest level in 15 months after a long period of relative stability. On Thursday, the peso slipped as low as 10 to the dollar before closing at 9.94, a rate not seen since March 1999. As recently as May 31, a dollar cost just 9.50 pesos.

With the closest presidential election in Mexican history just three weeks away, investors’ nerves are frayed even though Mexico’s economic fundamentals remain healthy. Many financial analysts believe the sudden dip in the peso will be temporary, and some welcome the softening of what they believe had become an overvalued peso. Still, jitters are likely to persist until the election.

Presidential election years in Mexico are historically tumultuous, but so far this year there has been little economic fallout, in part because the economy is in good shape.

During a visit to Washington on Friday, President Ernesto Zedillo reminded a television interviewer that the nation has recorded a string of positive economic indicators, including Thursday’s announcement that inflation for May was the lowest in 28 years.

“Some days the peso goes down and other days it goes up,” he said. “I believe the great advance that we have made in our country is that the exchange rate is no longer a focal point of economic decisions or of the confidence of the people.”

He spoke out a day after the currency fell by just over 2%, a drop that activated an automatic Central Bank auction of dollars to stem further dramatic fluctuations. Of the $200 million put up for auction at 9.99 per dollar, buyers took only $50 million.

Despite the slight rebound Friday, the free-floating peso remains off 3.49% for the week, Bloomberg News calculated, the worst slide of any global currency this week.

The sudden weakening of the peso, if sustained, could make Mexican exports more attractive to foreign buyers. But it would reduce the buying power of Mexicans, which in turn might hurt California and other U.S. exporters, whose goods would become less affordable south of the border. Mexico has become California’s leading trade partner.

The peso’s fall was set off in part by remarks made by the ruling party’s front-runner, Francisco Labastida, who warned Monday: “If we do not win with a wide margin, we will have problems in the country--demonstrations and disturbances.”

Labastida is virtually deadlocked with challenger Vicente Fox, the candidate of the center-right National Action Party, although there have been hints in recent polls that Labastida has stopped Fox’s charge and is regaining momentum. Still, the closeness of the ballot in a country where Labastida’s party has won every election since it took power in 1929 has fed a climate of uncertainty, culminating in the peso’s sudden volatility.

Finance Minister Jose Angel Gurria said Thursday that speculators hoping to capitalize on that uncertainty may well see a rebound that will force them to swallow losses. He said currency markets have been stable because they have focused on Mexico’s fundamentals: “The economy is growing, inflation is falling, interest rates are falling, more jobs are being created and real wages are rising.”

Alfredo Coutinho, an economist for the Ciemex-WEFA consulting firm in Pennsylvania, called the peso’s slide the result of “a speculative attack on the peso because of the political environment, perceived political risk and political uncertainty,” fed by comments from Labastida and Fox.

“As long as we see these kind of problems in the political arenas, we can expect in the next two or three weeks that nervousness will persist in the exchange rate.”

But Coutinho noted that the peso has held its value against the dollar even though Mexican inflation has been higher than U.S. inflation in the last few years. Therefore many analysts view the peso as overvalued.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Peso Peril

After a prolonged period of strength, reflecting Mexico’s growing economy, the peso plunged sharply this week. Analysts blamed it on jitters over the July 2 presidential election. Pesos per dollar, monthly closes and latest:

*

Friday: 9.895

Source: Bloomberg News