Fed buys pesos as Mexico seeks to calm fears of London investors

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The US Federal Reserve yesterday bought pesos in the foreign exchange markets in an attempt to support the beleaguered Mexican currency. Dealers said the Fed, intervening at the request of the Bank of Mexico, spent a relatively small amount in he lping the peso to rise 30 centavos to 5.20 to the dollar.

Mexico announced that it had also drawn on its $18bn international support fund for the first time yesterday. It used $500m of its $9bn US credit and C$83m of the C$1.5bn funds promised by the Canadian government.

Mexico's foreign exchange reserves fell by $600m to $5.55bn between 31 December and 6 January, reflecting a stampede out of the country by investors after the crisis devaluation of the peso just before Christmas.

The intervention to support the peso came as Mexican officials arrived in London to meet Bank of England and Treasury officials as well as a group of investors.

Francisco Gil Diaz, vice-governor of the Bank of Mexico, and Santiago Levi, deputy finance minister, spelt out details of the country's emergency economic programme and discussed the financial markets' reaction with officials at the Bank of England.

The Bank has put up some of the money for the $18bn international rescue fund.

The Mexicans' presentation met a mixed reception from British fund managers who attended the London meeting for investors. The visiting team insisted that Mexico was not insolvent, but had a short-term liquidity problem.

Tim Love, head of Latin American investment for Mercury Asset Management, said: ``Their credibility has definitely gone up another notch. I'm sure there will be more pressure on the currency, but that will come from people who are forced sellers.''

Mr Love said the Mexican presentation had reassured investors that the government would be able to meet its debt repayments this year. The international fund, along with $5.55bn in foreign currency reserves and income from privatisations, would easily cover payments of $28.5bn due on tesobonos, the dollar-linked government bonds.

Others were less comforted, however. Mark Turner, manager of Perpetual's Latin American portfolio, said: ``We did not come out of the meeting feeling better about Mexico. They did not say anything to improve sentiment.''

Mr Turner said that stabilising the peso would be crucial. ``Like other investors, we are keeping the assets looking for currency gains.''

Some investors are known to be keen to sell the bulk of their Mexican holdings, however.