Aug. 1 (Bloomberg) -- The Mexican peso increased to the highest exchange rate against the U.S. dollar in almost six years on speculation the central bank will boost the country's benchmark lending rate from 8 percent at its Aug. 15 meeting.

``There continue to be expectations that the central bank will increase rates, and that the Fed won't, so that fortifies the peso,'' said Enrique Trejo, a currency trader with Ixe Banco in Mexico City.

The peso rose 1.01 percent, its biggest gain since July 2006, to 9.9357 per dollar at 5:08 p.m. in New York, from 10.0367 yesterday. The peso touched 9.9319 per dollar, the strongest since it reached 9.9193 on Oct. 24, 2002.

Bets that the Federal Reserve will hold off on rate increases were bolstered by a report today that the U.S. unemployment rate during July rose to its highest level in more than four years.

Futures traders increased bets that the Federal Reserve will keep borrowing costs steady for the rest of the year. Futures contracts on the Chicago Board of Trade show traders see a 46 percent chance the central bank will keep the rate unchanged at its December meeting, compared with 12 percent odds a month ago. The Fed next meets on rates on Aug. 5.

In Mexico, economists increased their forecast for inflation in 2008 to 5.07 percent from 4.74 percent previously, the central bank said in a monthly survey released today.

Analysts expect consumer prices in July to rise 0.49 percent from a month earlier, the bank said.

The Mexican central bank on July 30 raised its inflation forecasts through 2010, increasing speculation that policy makers will lift interest rates.

Key Lending Rate

The central bank has raised the key lending rate twice by a quarter-percentage point since the May 16 meeting, when it was 7.5 percent.

Annual inflation will quicken to as high as 6 percent in the fourth quarter, up from a previous forecast of no more than 4.75 percent, the bank said today. Inflation in the third quarter will be as high as 5.75 percent, the central bank said.

Given this scenario, the central bank is likely to raise rates ``at least one to two more times'' during the second half of this year, Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co. wrote in a note to clients. ``More progress on structural reforms is needed'' to push the peso substantially stronger against the dollar, ``but for now, rising risk appetite should see the peso continuing to rally,'' Thin wrote.

A stronger peso ``could help the central bank deflate the economy,'' said Alberto Ramos, an economist at Goldman, Sachs & Co., wrote in a report.

``While its true that a strong currency erodes the price competitiveness of exporters, it is no less true that entrenched high inflation hurts competitiveness as it increases costs and destroys demand,'' he added.

Yields on Mexico's 10 percent bond due December 2024 slid 4 basis points, or 0.04 percentage point, to 9.04 percent, according to Banco Santander Mexico. The price rose 0.33 centavo to 108.12 centavos per peso.

To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net

Last Updated: August 1, 2008 17:12 EDT