June 2 (Bloomberg) -- Mexico may sell its first euro- denominated bonds in more than two years as early as this week as the European currency's gain against the dollar spurs demand.

Mexico has approached investors about a sale of 10-year bonds through Citigroup Inc. and Deutsche Bank AG, said David Dowsett, who says he would buy some of the bonds for the $500 million emerging-market debt fund he helps manage at BlueBay Asset Management in London. The sale would be for about 1 billion euros ($1.2 billion), Dowsett said.

Demand among some European investors for euro-denominated assets has risen amid the common currency's 11.4 percent surge against the dollar this year. Mexico typically taps international capital markets in dollars and has sold $5.5 billion of bonds denominated in the U.S. currency in three sales so far this year.

``The question is whether there's enough demand to fully place the bonds,'' said Jean-Dominique Butikofer, who manages about $250 million of emerging market debt at Julius Baer Asset Management in Zurich. ``With less liquidity of Mexican bonds in Europe, they might have to pay a slightly higher premium than in the dollar market''

Butikofer, who was approached by banks for sale, said he expects the bonds to be priced later this week.

Citigroup spokeswoman Andrea Hurst declined to comment. Rohini Pragasam, a Deutsche Bank spokeswoman in New York, declined to comment. Alonso Garcia, Mexico's director of public debt issuance, did not immediately return telephone calls seeking comment.

Investment Grade

Mexico is seeking to take advantage of its investment grade rating to expand its investor base in Europe and mirror its success attracting U.S. investors such as pension funds that have not traditionally invested in Latin American securities. These investors have been lured by the relatively higher yielding Mexican debt as U.S. interest rates decline.

``The euro is a very appealing currency at the moment,'' said Rob Drijkoningen, who helps manage 2.8 billion euros at ING Investment Management in The Hague, and was among European investors who spoke with Mexican officials during meetings organized by Deutsche Bank last month. ``I don't think they have fully tapped that investor potential.''

Attracting new investors has helped the government reduce borrowing costs. In January, Mexico sold $2 billion of 10-year bonds priced to yield 2.46 percentage points over U.S. Treasuries with a comparable maturity. That compares with a 2.7 percentage point spread over U.S. Treasuries on a similar 10-year bond sold in January 2002.

The yield on Mexico's seven-year euro-denominated bond sold in March 2001 has dropped to about 4.1 percent from 6.2 percent.

Falling Rates

Mexico, Latin America's biggest economy, has attracted foreign investment by steadying its currency, lowering interest rates and bolstering trade ties with the U.S. since its 1994 currency devaluation. The country sells about 90 percent of its exports to the U.S., accounting for a quarter of its $600 billion economic output.

Mexico, which has met its financing needs for the year, would likely use the funds to retire other debts. Under Mexican law, the government can't increase the total amount of its outstanding foreign debt this year.

The dollar strengthened to $1.1683 per euro at 9:28 a.m. in London from $1.1767 late Friday.

Mexico has a long-term foreign debt rating of Baa2 from Moody's Investors Service, one level above the lowest investment grade, and BBB- from Standard & Poor's, its lowest investment grade.

Last Updated: June 2, 2003 14:45 EDT