By Anthony Harrup
MEXICO CITY -- The Bank of Mexico stepped into the exchange market Thursday for the first time in almost a year to support the peso, which hit new lows against the U.S. dollar on fears that protectionist measures by the incoming administration of U.S. President-elect Donald Trump could hurt the country's trade and investment.
The foreign-exchange commission, formed by central bank and Finance Ministry officials, said the dollar sales were to provide liquidity and ease the exchange volatility of recent days, and kept open the possibility of additional interventions.
A central-bank official confirmed the bank was active in the exchange market early Thursday.
The peso sank to a new all-time low against the dollar this week after Ford Motor Co. said it was canceling a planned $1.6 billion investment in a new assembly plant in Mexico that had been criticized by Mr. Trump. The decision led to concerns that other investments could be discouraged, limiting an important source of foreign income in Mexico.
The Bank of Mexico last intervened in the exchange market in February 2016, when it sold $2 billion after the peso reached new lows on the decline in oil prices, which affect Mexico's trade balance and federal government revenue.
At that time, the central bank also raised interest rates and suspended its scheduled dollar auctions in favor of spot interventions. The scheduled auctions, which took effect if the peso depreciated a set amount in a day, were depleting reserves without any notable benefit for the currency.
Mexico's foreign reserves ended 2016 at $176.5 billion, little changed from the end of 2015.The amount of the dollar sales will be reflected in next week's reserves report.
Thursday's decision to intervene was justified as the peso is excessively undervalued, Goldman Sachs economist Alberto Ramos said in a note. He estimated that the real effective exchange rate -- which takes into account a basket of currencies, trade and inflation -- has depreciated 41% since mid-2013.
"The current peso weakness is unprecedented outside the grip of a major crisis and is also visibly weaker than the level reached during the 2008-09 global financial crisis," he said.
The peso gave back some of its initial gains and was trading in Mexico City at around 21.4365 to the dollar around 1:15 p.m. EST, according to Infosel, compared with 21.5260 at the close Wednesday. It touched an all-time low of 21.6220 on Wednesday, Banco Base said.
The peso depreciated 17% against the dollar in 2016, affected by a widening trade deficit, increasing public debt levels that prompted ratings firms to change the sovereign credit outlook to negative and the impact of lower oil prices on the finances of state oil company Petróleos Mexicanos. Mr. Trump's rise in polls and eventual election victory also put pressure on the peso.
Concerns about the impact that a weaker currency could have on inflation, which accelerated toward the end of last year, prompted the Bank of Mexico to raise interest rates five times in 2016, increasing the overnight rate target to 5.75% from 3.25%.
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(END) Dow Jones Newswires
January 05, 2017 13:50 ET (18:50 GMT)
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