Sept. 2 (Bloomberg) -- Mexico’s peso rose for the first time in eight days after the foreign exchange commission said it will extend daily dollar auctions through the end of this month.

The commission said in a statement yesterday that it will continue to sell $50 million in the foreign-exchange market until Sept. 30. It also maintained the sale of $250 million when the peso weakens more than 2 percent in a day and said the possibility of carrying out “extraordinary” dollar sales continued.

“This should give confidence to the market,” said Vicente Gonzalez, head currency trader at RBS Mexico, a unit of the Royal Bank of Scotland Plc. “What people wanted is to have clarity on what would happen to the auctions and now they’ve got it.” Banco de Mexico had previously said that the auction amounts would run through Sept. 8.

The peso rose 0.2 percent to 13.6523 per U.S. dollar at 5 p.m. New York time, from 13.6806 yesterday, when it touched 13.6835, the weakest level since July 15 amid concern the bank would reduce the amount of dollars it sells in the auctions.

Mexico’s central bank began offering daily dollar auctions in October after the global financial crisis sent the peso tumbling, pushing it to a record low of 15.5892 on March 9. In March, the central bank began auctioning $100 million in daily auctions that didn’t require a minimum price and cut that amount to $50 million in June.

‘Marginally’

The joint central bank and Finance Ministry commission said it expects this year’s foreign reserves to end “marginally” above those of 2008. Mexico’s international reserves were $76.4 billion as of Aug. 28, compared with $85.3 billion at the end of last year.

The $4 billion in special drawing rights Mexico is getting from the International Monetary Fund is providing the central bank more room to continue selling dollars while reaching its goal of ending this year with international reserves around last year’s levels, said Rafael Camarena, an economist at Banco Santander in Mexico City.

“Given the current volatility in the market, the central bank is trying to not generate further noise by stopping the auctions now,” said Camarena.

The peso had fallen for seven straight days before today as concern mounts that the government will fail to get enough congressional support to raise taxes in a bid to stem a swelling budget deficit. The Finance Ministry is set to send Congress its budget proposals on Sept. 8.

S&P Warning

Mexico’s shrinking economy and a 38 percent drop in oil prices in the past year have led to lower tax revenue, widening the 2009 budget deficit to the equivalent of 3 percent of gross domestic product from 2.1 percent in 2008, according to the government. Standard & Poor’s has warned the country must create new sources of revenue to offset declining oil income if it is to avoid a downgrade of its debt rating. S&P rates Mexico’s foreign debt BBB+, the third-lowest investment-grade rating.

“Mexico has yet to have a mechanism to boost tax revenue and that continues to weigh on foreign inflows which the peso depends on,” said Juan Carlos Lopez, head currency trader at Intercam Casa de Bolsa SA. “Appetite to come into the Mexican market at this point seems null.”

The peso has weakened 3.6 percent in the past five days, leading a drop in emerging-market currencies, amid reduced appetite for higher-yielding assets on speculation a recent rally in global stocks was overdone.

‘Peso Will Stabilize’

“Eventually, we think the peso will stabilize and firm when risk appetite swings up again,” Win Thin, a senior currency strategist with Brown Brothers Harriman & Co., wrote in a report today. “As the U.S. exits recession, Mexico will likely be amongst the countries that will benefit directly.” Mexico sends 80 percent of its exports to the U.S.

Yields on Mexico’s 10 percent bond due December 2024 fell two basis points, or 0.02 percentage point, to 8.49 percent, according to Banco Santander SA. The yield has risen 27 basis points from 8.22 percent on June 4.

Speculation the government will need to raise prices of “regulated” products such as gasoline or boost local bond sales should it fail to garner support for its tax bill is pushing bond prices lower, according to Luis Flores, senior economist at IXE Grupo Financiero SA in Mexico City.

“If the government fails to raise taxes, it will have to look for alternatives which will hurt bonds by either boosting the supply of the securities or raising prices, which would lead inflation to quicken,” said Flores. “That concern will probably weigh on bonds through November and even until December when we know what will happen to taxes.”

To contact the reporters on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

Last Updated: September 2, 2009 17:48 EDT