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Et tu, peso? Mexican currency nears 5-year high vs. dollar

May 16, 2008 |  3:35 pm

All hail the almighty peso!

The Mexican currency today rose to its highest level in almost five years against the dollar amid rising inflation jitters south of the border.

Those inflation concerns are boosting the odds that the Mexican central bank will raise interest rates this year to damp price pressures. Higher rates tend to attract global capital, or help hold on to it, which can underpin a country’s currency.

Mexflag Banks were quoting 10.39 pesos to the dollar today for large transactions, down from 10.45 on Thursday and down from 10.91 pesos at the end of last year.

The upshot: You can count Mexico among the places in the world where your dollar is buying less.

The central bank held its benchmark short-term interest rate at 7.5% today for a seventh straight month (compare that with the U.S. Federal Reserve’s 2% rate), and policymakers warned that inflation pressures were "growing reason for concern."

The country’s inflation rate has been running at an annualized rate of about 4.5%, and there has been widespread speculation about a sharp jump in the prices of tortillas, a politically sensitive issue. This story explains more on the tortilla hubbub.

Mexico’s stock market has held up this year despite inflation worries. The IPC stock index eased 0.2% today to 31,486, but it’s up 6.6% year to date.

And the peso’s strength is a bonus for U.S. investors in Mexican shares: In dollar terms the IPC index is up 11.9% this year, while most U.S. stock indexes still are in the red.

The iShares MSCI Mexico Index exchange-traded stock fund has gained 10.6% this year.

Photo: Guillermo Perea/EPA