Mexico's peso weakens sharply as U.S. stocks drop

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MEXICO CITY Nov 12 (Reuters) - Mexico's peso weakened sharply on Thursday and stocks fell back from a 17-month high as investors pulled back from riskier assets after a drive this week to fresh highs.

The peso MXN=MEX01 slipped 0.73 percent to 13.244 per U.S. dollar, cutting into a nearly 2 percent rally this week on expectations U.S. interest rates will be held near zero for some time.

U.S. stocks turned negative, oil prices fell and the euro failed to break and hold above $1.50 after testing that level for several days, spurring dollar gains across the board.

The peso's slide halted just below its 100-day moving average. Traders say a break higher than the 13.26 level could signal further losses in coming sessions, but if the peso holds below that level, it could continue to firm.

Technical positioning on the currency is neutral, traders say, with no one taking big positions as the market expects Wall Street ratings agencies to decide on a possible downgrade of Mexico's debt in coming weeks.

"If a downgrade comes, you are going to see (the peso) go 30 centavos higher, and that would knock you out of whatever position, so that is what is keeping people on the sidelines right now," said Gerardo Margolis, vice president of emerging markets at TD Securities in Toronto.

Standard & Poor's and Fitch Ratings are expected to decide on a possible downgrade once lawmakers approve the 2010 budget, expected by this weekend.

Lawmakers watered down proposals from the President to curb the country's dependence on taxing declining oil output.

In stock trading, the IPC stock index .MXX lost 0.48 percent to 30,949 after closing at its highest since June 6, 2008 on Wednesday.

Shares in cement maker Cemex (CMXCPO.MX) lost 2.18 percent to 15.28 pesos while Wal-Mart de Mexico (WALMEXV.MX) dipped 0.27 percent to 50.81 after hitting an all-time high the prior session. (Reporting by Michael O'Boyle; Editing by James Dalgleish)