Mexico's peso jumped to a five-year high against the dollar but stocks slumped on Friday after the central bank raised its key interest rate for the first time in eight months to tackle rising inflation.
The peso strengthened 0.36 percent to 10.2750 per dollar, its strongest central bank close since early June 2003, while the benchmark IPC stock index dropped 1.05 percent to 29,533.44 points. The central bank lifted the key rate by 25 basis points to 7.75 percent at its monthly monetary policy review, saying inflation could increase beyond its forecast, although it also said risks to economic growth persist.
The rate hike widens the spread between the US target interest rate and Mexico's key rate, making peso-denominated assets more attractive to investors. The peso has gained 6.28 percent this year as the United States has cut interest rates while Mexico has sought to fight persistent inflation with a higher rate.
Long-term Mexican bonds surged following the decision as investors bet the rate hike would help reduce inflation. The price of the benchmark 20-year peso bond rose 0.328 of a point to bid 86.975, pushing its yield down 4 basis points to 8.93 percent.
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