April 29 (Bloomberg) -- Mexico's peso fell to a record low against the dollar on concern that faster inflation in the U.S. may prompt policy makers to raise interest rates, draining capital from developing nations such as Mexico.

The price deflator used to adjust U.S. gross domestic product figures rose at a 2.5 percent annual rate in the first quarter, up from 1.5 percent in the fourth, a government report showed today. At the same time, the U.S. economy, which buys 85 percent of Mexico's exports, expanded less than the median forecast in a Bloomberg News survey in the first quarter at a 4.2 percent annual rate.

``The combination of the two figures is negative for the peso,'' said Daniel Tenengauzer, a currency strategist at Lehman Brothers Inc. in New York. ``The Mexican central bank will have to hike rates a few more times before the peso stabilizes.''

The peso fell 0.4 percent to 11.4435 per dollar at 4:57 p.m. New York time. Elsewhere in Latin America, Brazil's real weakened from a 10-week low while the Colombian and Mexican pesos extended declines.

Earlier, the Mexican peso fell as much as 0.7 percent to 11.4730, weaker than the previous low of 11.4578 reached in intraday trading on Nov. 28. Its decline today was the third- largest against the dollar of the 16 most-traded currencies and pushed its 2004 decline to 1.7 percent, the fifth-best performance.

Mexican exports, which account for more than a quarter of the country's $626 billion economy, Latin America's largest, rose in March to a record high, climbing 20 percent from the year- earlier period to $16.58 billion.

The U.S. last raised interest rates in May 2000.

Mexican Rates

Tenengauzer expects the peso to rise from current levels as the Mexican central bank continues to cut overnight lending to banks in a bid to raise interest rates and curb inflation.

Policy makers this week unexpectedly raised the daily money- mark short to 37 million pesos a day ($3.3 million) from 33 million pesos - a move that will make it more expensive for banks to borrow. The bank raises and lowers peso lending to commercial banks in an effort to influence interest rates and currency.

The peso future contract for June 16 delivery fell 0.6 percent to 8.6700 cents per peso on the Chicago Mercantile Exchange.

Region

Brazil's real weakened from a 10-week low, losing 0.1 percent to 2.9660 per dollar while Chile's peso fell from a five- month low, losing 0.4 percent to 626.95 per dollar, Colombia's peso declined 0.5 percent to 2662.00 per dollar and Argentina's peso fell 0.2 percent to 2.8590 per dollar.

Peru's new sol gained for the second day in three, adding 0.2 percent to 3.4815 per dollar.

To contact the reporter on this story: Alexander Hanrath at ahanrath1@bloomberg.net

Last Updated: April 29, 2004 17:43 EDT