* Investors grow optimistic on Mexican economy * Brazil c.bank intervenes to curb FX gains * Mexico peso gains 0.8 pct, Brazil real drops 0.5 pct By Walter Brandimarte RIO DE JANEIRO, March 11 The Mexican peso extended its rally on Monday on optimism about the country's economic prospects following an unexpected rate cut last week, while the Brazilian real weakened as the central bank intervened to curb recent currency gains. The peso rose 0.8 percent to 12.5270 per dollar as investors bet a one-off cut in Mexico's base interest rate, rather than reducing the appeal of domestic assets, would further boost an economy that is also benefiting from hopes of market-friendly reforms. The peso has strengthened 2.8 percent so far this year, and more than half of those gains came after policymakers cut borrowing costs to 4.0 percent from 4.5 percent on Friday. "Regardless of the rate cut we remain positive in the still undervalued Mexican peso, which we continue to forecast as set to appreciate to 11.75 per U.S. dollar by the end of 2013," Alberto Bernal, head of research at Miami-based BullTick Capital Markets, wrote in a research note. On the opposite direction, the Brazilian real weakened 0.6 percent to 1.9560 per dollar after the central bank acted to stop the currency from further appreciating past the level of 1.95 per dollar - considered by many analysts as a boundary of an informal trading band imposed by policymakers. The real had pierced the 1.95-per-dollar level for the first time in 10 months on Friday, after higher-than-expected inflation data increased bets that the central bank would soon raise interest rates, adding to the appeal of real-denominated assets. Since then, investors had been trading with extreme caution, on the lookout for a possible government intervention. It finally came on Monday morning when the central bank called an auction to sell reverse currency swaps, derivative contracts that emulate the purchase of dollars in the futures market. "That intervention was expected. It doesn't mean the central bank wants to weaken the real. It only wants to smooth out its gains," said Caio Sasaki, an analyst with XP Investimentos in Rio de Janeiro. Sasaki believes the real may still appreciate past 1.95 per dollar, as long as those gains are not too sharp, as the government will likely favor a slightly stronger currency to fight inflation. The Brazilian real has gained over 4 percent so far this year on bets the central bank would use the currency as a tool to cheapen the cost of imported goods and help anchor inflation expectations. Brazil's consumer inflation reached 6.31 percent in the 12-month period through February, nearing the ceiling of a government target of 6.5 percent. Latin American FX prices at 1830 GMT: Currencies daily % YTD % change change Latest Brazil real 1.9560 -0.54 4.29 Mexico peso 12.5270 0.82 2.69 Chile peso 471.5000 -0.02 1.53 Colombia peso 1802.4400 -0.01 -2.02 Peru sol 2.5950 0.04 -1.70 Argentina peso 5.0725 -0.10 -3.15 Argentina peso 7.8000 0.38 -13.08
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