April 8, 2013 / 8:57 PM / 4 years ago

UPDATE 1-Mexico suspends dollar auctions in sign of peso worry

3 Min Read

MEXICO CITY, April 8 (Reuters) - Mexico on Monday said it would suspend U.S. dollar auctions triggered by sharp losses in the peso in a sign that authorities have become unnerved by brisk gains in the currency that could crimp exporters.

The country's currency commission, which is made up of officials from the central bank and the finance ministry, said that it would suspend the program put in place in November 2011 that offered $400 million on days of big peso losses.

"The conditions that motivated the establishment of the aforementioned central bank daily dollar sales auction have dissipated," the currency commission said in a statement, adding the auctions would end on April 9.

Mexican stocks and bonds have hit record prices recently on optimism that the new government will be able to push long-stalled economic reforms through the country's divided Congress.

The dollar auction mechanism was seen as a more market-friendly form of controlling currency weakness than the direct intervention employed by other emerging market central banks.

An unprecedented jolt last week from the Bank of Japan which announced $1.4 trillion in monetary stimulus over two years is expected to boost demand for emerging market assets such as the peso.

Mexico's central bank cut its benchmark interest rate to a record low of 4 percent in March in what was seen as a bid to deter speculators from piling into the Mexican peso.

But the peso has gone on to firm since the rate cut, hitting a nearly 20-month high on Monday.

Analysts said the removal of the dollar auctions suggested that policymakers could look to lower borrowing costs again if the peso keeps gaining ground.

"The probability that the central bank could cut the reference rate as soon as June has increased significantly, particularly if the exchange rate continues to strengthen," said Gabriel Casillas, an economist at Banorte-IXE in Mexico City.

The peso briefly weakened past 12.20 per dollar after the announcement.

Last month, officials said Mexico is committed to maintaining its freely floating exchange rate and is not currently contemplating any new mechanism to slow strong gains in the peso.

Investors are watching to see if Mexico will reinstate a mechanism of auctioning dollar "put" options, which could slow the pace of peso gains, but CIBC Latin America Strategist John Welch said the peso would have to go to 12 per dollar first.

"That's a decent way to intervene because it's really not the central bank, it's an information-neutral intervention," he said. "You sell the option and if people think the dollar is going to fall further, they execute and that puts a kind of moving floor to the peso."

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