MercoPress. South Atlantic News Agency

Mexico floods market with dollars to stop run on the Peso

Mexico's central bank and finance ministry confirmed that the bank had intervened on Wednesday to prop up the ailing peso currency by selling dollars directly to market players.

They also said the central bank would continue with daily dollar auction sales of up to 400 million US dollars under a mechanism it has been using in recent months to counter peso weakness. The Mexican currency recovered to 14.556 per dollar after hitting 14.70 earlier in the session, its weakest since 1993. The peso has been hammered in recent months as the US recession dampens demand for Mexico's exports, which prop up the economy, and on growing fears the slowdown is quickly spreading to the country. The currency has fallen around 5% against the dollar so far this year after a 21% slump in 2008. Mexico's central bank broke its long-held reluctance to intervene in currency markets last October when the global crisis spurred the peso's steepest declines in over a decade. Since then, the bank has held regular pre-announced auctions of hundreds of millions of dollars at a time but Wednesday's move was a surprise. The bank was offering dollars directly to brokerages and banks, well-placed market sources said, but the amount involved was not immediately clear. Mexico's economy is closely tied to that of the United States and some 80% of Mexico's exports go to its northern neighbour. Mexico's central bank lowered borrowing costs for the first time in nearly three years last month in a bid to boost the economy, which the bank thinks could contract as much as 1.8% this year. The market is expecting further aggressive rate cuts. The central bank has sold nearly 17 billion US dollars from its international reserves since October, but it is still flush with dollars from Mexico's oil sales. More over on Tuesday the US Federal Reserve extended a 30 billion swap line with Mexico, giving the central bank even more ammunition to defend the peso.