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Bank of Mexico tries to beef up value of peso

  • Story Highlights
  • The move did not work, with the dollar grabbing 45 percent more at day's end than in August
  • Some observers say the peso could fall as long as global markets remain unstable
  • The government says it expects deflation to occur
  • Secretary of housing acknowledges Mexico's economy will contract this year
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By Rey Rodriguez
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MEXICO CITY, Mexico (CNN) -- The Bank of Mexico auctioned off billions of dollars Tuesday in an attempt to support the faltering Mexican peso.

The measure did not have the desired effect, however, with the dollar commanding 14.5 pesos at the end of the day, 45 percent more than in August.

Some observers said the peso could continue falling as long as international markets remain unstable.

"The authorities should be very sensitive to these types of situations, which have been recurrent, and should be acting in response," said Carlos Ponce, head of research at Banco Ixe. "But I could not rule out the possibility of even greater change."

He said the economy, beset by crisis, would have a hard time bouncing back from a further fall of the peso, and he was worried that continued difficult times could spark inflation.

The government is trying to calm those concerns. It maintains that the recent fall in the price of primary materials and the drop in consumption this year will result in a deflationary scenario, the opposite of what occurred last year, when the cost of some products, like cooking oil, rose 36 percent.

"We don't definitively see a serious inflationary environment this year in basic materials," said Gerardo Ruiz Mateo, secretary of the economy.

What observers do consider likely is a significant increase in unemployment, after which the private sector's growth estimates for 2009 will again be readjusted downward.

Even the secretary of housing recently acknowledged for the first time that the economy will contract this year, predicting a 1 percent drop in gross domestic product.

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