Mexico peso firms sharply after rate cuts in Europe

MEXICO CITY, Dec 4 (Reuters) - Mexico's peso firmed sharply on Thursday after a round of interest rate cuts in Europe pushed investors to bet that aggressive central banks around the world will help contain the global economic downturn.

The peso MXN=MEX01 firmed as much as 0.99 percent to 13.52 per dollar.

The European Central Bank cut interest rates by a record 75 basis points on Thursday to 2.50 percent, while the Bank of England chopped 100 basis points to take its interest rates to the lowest since 1951. Sweden also aggressively cut rates.

"All Europe is cutting rates, the U.S. is also going to go even lower, that helps high-yielding currencies," said Bartosz Pawlowski, an emerging market strategist at TD Securities in London.

Mexico's central bank has held back from slashing its key interest rate, now at 8.25 percent, as inflation remains at a 7-year high. The Federal Reserve is expected to further cut its target rate from 1 percent in December.

The spread between the two countries' benchmark rates stands at 7.25 percentage points, making peso-denominated debt attractive to yield-hungry investors.

The peso has been hammered since October as worries mount that a recession in the United States will drag down Mexico with it.

"There are some cautious expectations that maybe the worst for the peso is behind us," Pawlowski said.

In debt trading, the yield on the government's benchmark 10-year peso bond MX10YT=RR fell 5 basis points to 8.81 percent.

The benchmark IPC stock index .MXX rose 0.35 percent to 20,217 points, led by gains in Cemex (CMXCPO.MX), which rose 6.56 percent to 9.75 pesos amid bets the world's No. 3 cement maker will be able to refinance weighty debt payments next year.

Offsetting gains, shares in top retailer in Wal-Mart de Mexico (Walmex) (WALMEXV.MX) lost 0.67 percent to 36.90 pesos.

Credit Suisse downgraded Walmex on Thursday to "underperform" from "outperform," citing the likely impact of a weakening economy in Mexico on consumer spending. (Reporting by Michael O'Boyle)