Mexico's Peso Rises to Highest Since 2006 on U.S. Manufacturing

April 1 (Bloomberg) -- Mexico's peso rose to its strongest level since August 2006 after a gauge of U.S. manufacturing contracted less than forecast, easing concern that slowing U.S. growth will reduce demand for Mexican exports.

The gains in the peso come after a report yesterday showed Mexico's economic growth accelerated in January, expanding 4.2 percent from a year earlier after growing 3 percent the previous month. Mexico's government is blunting the impact of a U.S. slowdown through tax reductions and increased spending, Finance Minister Agustin Carstens said yesterday.

Mexico is ``weathering the effects of an external slowdown,'' said Rafael Camarena, an economist in Mexico City at Banco Santander SA, the biggest trader of peso-denominated bonds. Mexico sends 80 percent of its exports to the U.S.

The peso advanced 0.5 percent to 10.5917 per dollar at 12:23 p.m. New York time from 10.642 yesterday. It reached 10.5908, the strongest since Aug. 25, 2006.

The Institute for Supply Management's U.S. manufacturing index rose to 48.6 last month from 48.3 in February. Economists surveyed by Bloomberg expected a reading of 47.5. Fifty is the dividing line between contraction and expansion.

The peso was also bolstered by a rally in global equities that buoyed demand for higher-yielding assets in developing nations. U.S. stocks rose after Lehman Brothers Holdings Inc. and UBS AG said they are raising $19 billion to replenish capital, fueling speculation that the worst may be over for subprime- related losses.

Energy Legislation

Speculation that President Felipe Calderon will get legislators to end a ban on private and foreign investment in the nation's oil industry is also fueling demand for peso-denominated assets, Camarena said.

The government has said that loosening the state's monopoly on oil is the only way that Mexico can halt declines in output and reserves. Oil provides almost 40 percent of the government's income. Calderon has yet to present legislation to Congress.

Mexican bonds were little changed after a central bank survey showed economists raised their year-end inflation forecast, damping demand for Mexico's fixed-income securities.

Mexico's inflation will end this year at 3.98 percent, according to the average estimate of 35 economists surveyed by Banco de Mexico between March 24 and March 28. Economists had forecast inflation of 3.73 percent for 2008 in the prior monthly survey.

Yields on Mexico's benchmark 10 percent bonds due in December 2024 were little changed at 7.55 percent, near their lowest since June. The bond's price today fell 0.02 centavo to 123.16 centavos per peso.

Mexico plans to sell today 4.5 billion pesos ($424 million) of five-year bonds and 550 million inflation units, or 2.2 billion pesos, of 10-year inflation-linked bonds at a local auction. The government also plans to raise 15.9 billion pesos in a sale of Treasury bills. Banco de Mexico is scheduled to disclose the results of the sale at 3:30 p.m. New York time.