Mexico's peso strengthened in thin holiday volume on Friday, but was on track to end 2011 with a 12 percent decline against the dollar, with little in sight that will relieve pressure on emerging market currencies. Market players, wary of taking positions as they closed out their books for the year, remain focused on the European sovereign debt crisis, which still shows no signs of being resolved after rattling emerging markets in 2011.
"The forefront in investors' minds is Europe and how the region's governments and its banks are going to be able to fund itself over the course of the next few months," said Mike Moran, Latin American economist with Standard Chartered in New York. "It can certainly get worse."
The Mexican peso strengthened 0.45 percent to 13.930 per dollar. Markets in Brazil and Argentina were shuttered for the New Year holiday. Chile's peso gained 0.15 percent to 519.30 per dollar, finishing the year with about a 10 percent loss. The European Central bank offered nearly half a trillion euros in cheap bank loans last week in an effort to ease a growing credit crunch and spur the purchase of European debt.
But a disappointing auction of 10-year bonds in Italy - the euro zone's third largest economy - has made investors nervous as they look to a January 5 auction of France's long-term debt to gauge market sentiment. Rising default risk in Europe threatens to saddle banks with losses on their sovereign bond holdings, leading to lower lending and a global slowdown.
Further worrying investors, ratings agency Standard & Poor's put almost the entire euro zone and some of its biggest banks, including Deutsche Bank, BNP Paribas, Societe Generale and UniCredit, on a downgrade warning this month. Moran said the turbulence could take the Mexican peso to 14.20 per dollar in the first quarter. He also sees further weakness in the Brazilian real.
Brazil's real closed in local trading Thursday at 1.8675 to the dollar, for a decline for the full year of around 12 percent. Moran said the real could slip to 1.90 per dollar in the first quarter. In offshore non-deliverable forward trading (NDF) on Friday, the real was little changed. The one-month Brazilian real NDF firmed 0.16 percent to 1.8737 to the dollar. The one-month NDF reflects expectations for the real-dollar exchange rate in 30 days.