Mexico's Peso Rallies After Central Bank Sees 2H Econ Recovery

MEXICO CITY -- Mexico's peso staged a major rally against the U.S. dollar Friday, after the Bank of Mexico said it will pause its monetary easing cycle on signs of an economic rebound during the second half of the year.

The peso gained 1.6% versus the U.S. currency to close in Mexico City at MXN13.3270, compared to Thursday's close of MXN13.5360.

After briefly touching levels around MXN13.85 on Monday, the peso steadily firmed throughout the week, thanks to improving U.S. economic data and strong corporate earnings from large banks such as Goldman Sachs Group Inc. (GS) and technology bellwether Intel Corp. (INTC).

"I got the feeling that, when the Bank of Mexico said it wasn't going to cut anymore, a lot of investors saw that as positive for the peso," said a Mexico City trader.

"People started to dump dollars. A lot of traders were short the peso and long the dollar," he added

The Bank of Mexico cut its key overnight rate by a quarter of a percentage point, to 4.5%, as expected Friday, and said it will hold off on further rate cuts in the near future.

Future rate actions will be determined by the economy and inflation converging with the central bank's 3% inflation target by the end of 2010, the Bank of Mexico said in its post-meeting communique.

The central bank has cut the overnight rate by 375 basis points since January to cushion a plunge in economic activity as a recession in the U.S. and other major economies cripples international trade.

"In Mexico, the contraction in economic activity during the first half has been extremely severe," the central bank said. "However, a better performance in overall economic activity is expected in the second half."

In other local markets, the benchmark IPC stock index was up 0.1% on moderate volume less than an hour from the close.

The yield on 10-year Mexican government bonds due 2018 was unchanged at 8.12%, while the yield on 20-year bonds maturing in 2024 rose one basis point to 8.40%. Yields move inversely to bond prices.