Mexico's cenbank steps in to support tumbling peso

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By Cyntia Barrera Diaz and Lizbeth Salazar

MEXICO CITY, Feb 4 (Reuters) - Mexico intervened to offer dollars in currency markets on Wednesday and boost the peso, battered to a record low on fears the U.S. recession is sucking in Mexico too.

"The Foreign Exchange Commission instructed the central bank to inject liquidity into the market," said a source at the central bank, who asked not to be named.

The Mexican currency MXN= MEX01 firmed 0.17 percent 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 U.S. recession dampens demand for Mexico's exports, which prop up the economy. The currency has fallen around 5 percent against the dollar so far this year after a 21-percent 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.

"It seems the central bank wants to know how much each bank needs, perhaps to prepare a much bigger intervention in favor of the peso," said Luis Flores, an economist at IXE brokerage in Mexico City.

Flores said the bank was worried that a continued fall of the Mexican currency could fuel higher inflation and prevent policymakers from cutting interest rates to boost the flagging economy.

Mexico's economy is closely tied to that of the United States and some 80 percent of Mexico's exports go to its northern neighbor.

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 percent this year.

The market is expecting further aggressive rate cuts.

The central bank has sold nearly $17 billion from its international reserves since October, but it is still flush with dollars from Mexico's oil sales.

On Tuesday, the U.S. Federal Reserve extended a $30 billion swap line with Mexico, giving the central bank even more ammunition to defend the peso.

(Additional reporting by Michael O'Boyle, Editing by Chizu Nomiyama)