Mexico's Peso Gains on Prospects Congress to Approve Tax Plan

-- Mexico's peso rose to a one-week high on expectations legislators will approve President Felipe Calderon's proposal to boost tax collection early next month, reducing the country's dependence on oil export revenue.

The peso snapped two days of declines and local-currency bonds rallied. The congressional leader of the opposition Institutional Revolutionary Party, known as PRI, today said his party agreed to back the tax plan should Calderon lower proposed collection from companies. Calderon needs the support of the PRI since his party lacks a majority in congress.

``Reports that the PRI would be willing to accept the tax proposal is helping spur gains,'' said Rafael Camarena, a Mexico City-based economist at Santander Central Hispano SA.

The peso rose 0.6 percent to 11.0750 per dollar at 1:47 p.m. in New York. It earlier touched 11.0573, its strongest since Aug. 14. The gain in the peso was the second-best performance against the dollar after the Brazilian real.

Expectations the Federal Reserve will cut its target interbank lending rate next month to stem losses in credit markets also helped bolster Mexican assets, Camarena said.

The Fed last week cut its discount lending rate by 0.5 percentage point to 5.75 percent and yesterday made it cheaper for dealers to borrow Treasuries from the New York Fed.

Most emerging-market currencies and global stocks rose today, suggesting renewed investor demand for riskier assets. Concerns the credit crunch would hurt growth in the U.S., the biggest buyer of Mexican goods sold abroad, had fueled a 3 percent decline in Mexico's peso since the end of June.

`In Tandem'

``We've been moving in tandem with the external volatility,'' said Eduardo Estrada, head of the fixed-income trading desk at Mexico City-based asset manager Actinver SA. Still, ``approval of the tax reform should help bolster Mexican assets, easing swings that are fueled by the external environment.''

Calderon submitted a proposal to legislators in June that seeks to boost tax collection by 3 percent of gross domestic product by 2012. Calderon has said he wants congress to approve the bill by Sept. 8, the deadline for legislators to vote on next year's budget.

Jorge Estefan, the leader of the PRI in the lower house, said in an interview with Radio Formula today he would meet with other opposition parties to garner support for the proposal.

Calderon has ``paved the way for approval of the reform,'' John Welch, chief Latin America economist at Lehman Brothers Holdings Inc., wrote in a note to clients today. ``We expect tax reform to pass.''

The yield on the 7 1/4 percent bonds due December 2016, Mexico's 10-year benchmark security, fell 6 basis points, or 0.06 percentage point, to 7.89 percent. The price, which moves inversely to the yield, rose 0.41 centavo to 95.78 centavos per peso, according to Santander.