Dollar declines as Clinton calls for Mexican aid deckys

President Bill Clinton has instructed the US Treasury Department and the Federal Reserve to make more credit available to help Mexico maintain support for the peso, and was rewarded by a further fall in the dollar, reflecting market fears that the US would limit the interest rate rises needed to control domestic inflation to avoid turning the screw on Mexico.

Mexico has been granted credit facilities worth $18bn but faces the need to redeem up to $30bn worth of dollar-linked securities over the next year. The 40 per cent fall in the value of the peso over the past month has added massively to the cost of servicing the debt.

The devaluation will impose a severe recession on Mexico this year, driving inflation up from 5 to about 20 per cent.

If the recent economic package restricting wage rises to 7 per cent holds, the result will be a severe squeeze on wage-earners, according to Peter West, economic adviser at West Merchant Bank.

Interest rates on 28-day credits rose to 40 per cent yesterday and the 37-share index dropped more than 4 per cent in the first hour of trading, following 6 per cent falls on both Monday and Tuesday.

The Mexican economic crisis is of global importance, and potentially much more serious than the current bout of instability in currency markets, the international speculator George Soros told a conference in Bucharest. The Mexican crash has already hammered share prices in other emerging markets as international funds rush to withdraw funds.

Shares fell sharply in India, Pakistan and South Africa yesterday. In Hong Kong, rumours that the health of Deng Xiaoping had deteriorated further swept through the stock market in mid-afternoon, killing off a strong recovery. The Hang Seng index closed 148.97 down at 7,392.75, and 333 points below the day's best levels.

The Milan stock market reflected hopes that President Oscar Luigi Scalfaro will be able today to invite one of three leading neutral candidates to form a government. Shares also opened slightly firmer in Madrid, although an opening rally in Spanish bond prices quickly ran out of steam.

Currencies were quieter, although the lira drifted to 1,058 to the mark. The peseta ended at just under 87 to the mark.