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Mexico announces plan to sell dollars

Mexico announced on Thursday that it would start to sell dollars in international markets, in its most concerted plan to do so since the devaluation it suffered during the "Tequila Crisis" of 1994.
Mexico announces plan to sell dollars
By John Authers in Mexico City
Published: March 21 2003 4:00 | Last Updated: March 21 2003 4:00
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Mexico announced on Thursday that it would start to sell dollars in international markets, in its most concerted plan to do so since the devaluation it suffered during the "Tequila Crisis" of 1994.

The move had an immediate, sharp effect on the peso, which reversed the decline it saw on the night's news from Iraq and recovered to 10.85 against the dollar, having slipped from 10.88 to 10.95 at the opening.

The dollar sale will also be seen on the markets as a further signal of confidence by Mexico's fiscal and monetary authorities, following the bullish forecast this week by Francisco Gil Diaz, treasury secretary, that gross domestic product would grow by 3 per cent year on year during the first quarter.

Officials said the move was intended to allow an orderly reduction of its international reserves, which have been at record levels for some time and exceeded $50bn (?47bn, 32bn) for the first time this month.

The reserves, derived largely from export income generated by Petroleos Mexicanos, the national oil monopoly, were boosted by the current high oil price, and likely to grow by a further $7bn this year.

According to the treasury ministry, the reserves do not generate a strong return, so the net benefits of holding them have reduced.

Daily auctions, which will start on May 2, will follow pre-determined rules, limiting discretion to use the sales as part of monetary policy. The amount auctioned will be determined by a formula based on inflows.

However, the impact of the sales on the peso, which has been tightly correlated with the US dollar for the last year, may also have influenced the decision.

The peso had endured a depreciation of 25 per cent against the dollar since last April, falling from 9.01 to 11.23 to the dollar. Traders view the currency as a weak adjunct of the dollar and tend to sell it against the dollar in unison with selling the dollar against the euro. However, the peso has recovered in line with the dollar in the last two weeks.

A spokesman for the treasury ministry described the decision to start selling at this point as "a coincidence", adding: "We would have announced the same measure now, whether the peso was at nine, 10 or 11 to the dollar."

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