Oct. 21 (Bloomberg) -- Mexico's peso fell for a third day as the central bank's purchase of $400 million worth of the currency did not overcome concern that the credit crisis is driving the U.S. into a recession.

The currency dropped as much as 2.4 percent as U.S. stocks fell and the Federal Reserve said it will help some money market funds meet redemption requests from investors by purchasing commercial paper.

``The fact that equities haven't been able to sustain gains and the news from the Fed that some money market funds are having difficulty meeting redemptions are pushing the peso and most emerging-market currencies lower,'' said Francisco Diez, director of emerging- market trading at RBC Capital Markets in New York. ``We have another wave of risk aversion hitting the market.''

The peso fell 1.9 percent to 13.2366 per U.S. dollar at 5:10 p.m. New York time, from 12.9901 yesterday. Banco de Mexico has bought $11.6 billion worth of pesos in the past two weeks to shore up the currency after it plunged to a record low of 14.2927 on Oct. 8.

The central bank has tapped near-record foreign reserves to defend its currency as investors have pulled out of emerging markets to seek safer, lower-yielding assets. Banco de Mexico may stop using its foreign reserves to prop up the peso soon, central bank Governor Guillermo Ortiz said in an interview on the Televisa network on Oct. 16.

Peso Purchases

The bank bought $6.4 billion worth of pesos on Oct. 10. It said today that reserves rose to $78.7 billion from a one-year low of $75 billion the previous week. Reserves stood at a record $86.9 billion on July 18, up 52 percent from three years earlier, as a rally in oil, Mexico's biggest export, buoyed dollar inflows.

The economic slowdown in the U.S., which buys about 80 percent of Mexican exports, has hindered expectations for growth in Mexico. Merrill Lynch & Co. reduced its 2009 economic growth forecast for Mexico to 0.9 percent from 1.9 percent, according to an e-mailed report yesterday. The forecast is Merrill's lowest for 10 Latin American countries.

Mexican President Felipe Calderon plans to boost public spending next year to create jobs and spur growth. Mexico's Senate unanimously approved a budget bill today that envisions the largest deficit since 1990.

Plunging Oil

The peso has also declined on plunging oil prices. Crude oil for November delivery dropped 4 percent to $71.289 per barrel at the close of floor trading on the New York Mercantile Exchange. Oil has fallen 52 percent since its July 11 peak of $147.27 and accounts for 40 percent of the Mexican government's revenue.

Petroleos Mexicanos, the state-owned oil company, said yesterday that monthly crude output fell to the lowest since November 1995 on decreased demand from U.S. refiners and as its largest field declined. Falling output is costing more than 275 billion pesos in sales this year.

The peso has plummeted 26 percent from a six-year high reached on Aug. 4, a decline that hurt Mexican companies investing in currency derivatives. Vitro SAB, the century-old Mexican glassmaker, may be forced into creditor protection because of such losses, according to analysts at ING Groep NV and Deutsche Bank AG.

The Mexican government is offering loan support for companies after Controladora Comercial Mexicana SAB, Mexico's third-largest retailer, declared bankruptcy on Oct. 9 after failing to raise cash to meet margin calls on losses of $1.08 billion of currency derivatives. Companies including Cemex SAB, Gruma SAB and Grupo Industrial Saltillo SAB also reported derivative losses, mostly tied to the currency.

Target Lending Rate

The central bank left its benchmark interest rate unchanged on Oct. 17 at 8.25 percent as it attempted to strike a balance between controlling inflation and dealing with a slowing economy. Five of 28 economists forecast a rate cut in November in a survey conducted by Citigroup Inc.'s Banamex unit and released yesterday. That was up from only one of 24 analysts who predicted a cut in an Oct. 6 survey.

The yield on Mexico's benchmark 10 percent peso bonds due in 2024 rose 28 basis points, or 0.28 percentage point, to 9.95 percent, the highest level since June 2006. The bond's price fell 2.26 centavos to 100.41 centavos per peso, according to Banco Santander SA.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net

Last Updated: October 21, 2008 17:20 EDT