* Mexico peso firms as U.S. output beats expectations
* Brazil real, Chile peso weaker, trim early losses
* Europe debt yields weaken, crisis may widen beyond Italy
* Colombia peso firms, Peru sol little changed on Tuesday
By Jeb Blount and Michael O‘Boyle
RIO DE JANEIRO/MEXICO CITY, Nov 16 (Reuters) - Mexico’s peso gained against the U.S. dollar on Wednesday in mixed trading for Latin American currencies, after the United States reported better-than-expected industrial output in October.
The Mexican peso , Latin America’s most-traded currency, firmed 0.25 percent to 13.5805 to the dollar.
U.S. output rose 0.7 percent, compared with a 0.1 percent decline in September, the U.S. Federal Reserve said. The median estimate of 72 analysts surveyed by Reuters was for a 0.4 percent increase.
The result, coming after stronger-than-expected retail sales on Wednesday, lifted the prospects for Mexico, which gets nearly 80 percent of its export earnings from its northern neighbor.
“The U.S. data, the industrial production, retail sales, are somewhat stronger than expected and this is leaking into the psyche and to a certain extent is being supportive of the peso,” said Enrique Alvarez, Latin America bond and currency analyst with IDEAGlobal in New York.
The peso, though, is unlikely to move much outside of a narrow trading range near 13.50 to the dollar, said Clyde Wardel, Latin America economist with HSBC in New York.
“Positioning in the peso is basically neutral and foreign investors seem to be basically holding on to their local bond positions,” he said. “There is little conviction about any trend so you’re likely to see the peso and other Latin American currencies rangebound.”
The peso is also receiving support from investor demand for Mexican local-currency debt. Mexican 10 year bonds yield more than four percentage points more than comparable U.S. Treasuries
Foreign investors held a record 697 billion pesos ($51.3) billion) of local-currency Mexican Treasury bonds with maturities of three to 30 years on Nov. 7, the latest date for which data is available on the Mexican central bank’s web site.
That is 3.1 percent more than a month earlier and nearly triple the level of 2008.
Demand for bonds should help keep the peso near the 13.67 to 13.68 to the dollar level, said Alfredo Puig a trader at Vector, a Monterrey, Mexico currency brokerage.
Any weakening beyond that level, perhaps because of concerns related to Europe’s debt crisis, may boost demand for peso bonds, possibly limiting or reversing losses, he said.
The gains in Mexico come as European news continues to roil other Latin American markets.
Brazil’s real and Chile’s peso both weakened sharply in early trading, only to erase some of their losses in the early afternoon (1645 GMT).
Brazil’s real shed 0.11 percent to 1.7690. Earlier it lost more than 1 percent. Chile’s peso was little changed from Tuesday at 509.60 after sliding more than a percentage point.
“About the only thing that’s clear from Europe right now is that the debt contagion is spreading,” Alvarez said “It is getting harder to get the genie back into the bottle.”
Italian 10-year bond yields were above 7 percent for a second day and Spanish 10-year yields rose to a eruo-currency-era high of 6.41 percent.
As yields rise, governments must pay more to borrow, dedicating more of their budgets to interest payments and less to schools, roads, pensions and other services.
Italian and Spanish yields are close to levels where rising finance costs make it harder to attract investors to buy new bonds and pay maturing debt, a situation that could lead to default.
The potential losses to banks and investors from the European crisis could be large enough to choke offlending and investment worldwide, sending global growth plummeting.
In such an environment, many investors have sought to cut their risk by buying assets in dollars, the world’s most traded, or “liquid”, currency in favor of assets in Latin American and other emerging market currencies.
Elsewhere in Latin America the Colombian peso firming 0.23 percent to 1,911.00 Peru’s sol was little changed from Tuesday firming 0.04 percent to 2.7010.