Mexico's Peso Weakens Against Dollar As European Yields Soar

MEXICO CITY--The Mexican peso retreated against the U.S. dollar Thursday as European sovereign debt worries returned after Spain's and France's borrowing costs soared.

--Peso loses ground as euro-zone debt worries resurge

--Currency reaches weakest level since early October

--Forex volatility could keep central bank on hold in December

MEXICO CITY (Dow Jones)--The Mexican peso retreated against the U.S. dollar Thursday as European sovereign debt worries returned after Spain's and France's borrowing costs soared.

The peso closed in Mexico City at MXN13.7195 to the dollar, according to Infosel, compared with MXN13.6360 at the close Wednesday, returning to levels not seen since early October.

"Borrowing costs in the European Union are still very high, limiting any upside trend for the Mexican peso," said BBVA analyst Claudia Ceja in a note. "We expect the peso's volatility won't disappear in the near term...at least until the EU reaches a convincing solution."

The Spanish Treasury said Thursday it sold around EUR3.6 billion ($4.8 billion) of benchmark 10-year paper, but at the highest yield paid since the euro's inception. France's borrowing costs also rose as the government sold EUR6.98 billion of medium-dated notes.

"The biggest risk right now is that it seems there's no longer a clear distinction between euro-zone peripheral and core economies," said Santander analysts in a report.

The peso has been suffering from high volatility in recent months as the European crisis made investors very cautious about risky assets, including emerging market currencies.

The Mexican currency has depreciated around 10% this year, mostly due to such external factors as the debt problems in Europe and, to a lesser extent, concerns about the sluggish U.S. economic recovery.

Peso depreciation is a key factor the Bank of Mexico will take in account in its next monetary policy meeting on Dec. 2. Comments by central bank Gov. Agustin Carstens have recently suggested the bank isn't going to put at risk peso stability by cutting rates, despite the slowdown the Mexican economy is experiencing, as the exchange rate could be a risk for inflation in the future.