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Foreign Exchange

Local currency bonds: Mexican peso attains global status

European borrowers make peso bonds hot new instrument

Latin America has a long history of crises involving wrenching devaluations, hyperinflation, or both. No-one knows this better than Latin Americans themselves; they generally keep savings of any magnitude safely offshore in dollars. If you're looking to buy a house in the region, chances are it will be priced in dollars; if you're a bank looking to attract local-currency deposits, you'll have to pay a large premium over local dollar interest rates.

Even as the price of credit risk has declined dramatically over the past few years, currency risk has remained relatively expensive.

But 2005 looks as if it will be the year when Latin America finally attained a global currency of its very own: the Mexican peso.

Replacements

Looked at from a historical perspective, the Mexican peso is not the kind of instrument one would like to invest in over the long term. Even its official currency code spells danger: the old peso, or MXP, was replaced in 1993 with the new peso, or MXN. One new peso bought 1,000 old ones: a telling signal of Mexico's woes since its default in 1982.

But this summer the Mexican peso joined the likes of the South African rand and the New Zealand dollar as a reasonably stable currency that a wide range of investors can look to for yield pick-up.

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