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(Recasts to focus on demand, peso reaction, adds background)
By Michael O'Boyle and Anthony Esposito
MEXICO CITY, March 6 (Reuters) - Demand was double the availability of $1 billion in hedge contracts Mexico's central bank offered for the first time on Monday, but the auction failed to provide support for the peso.
Last month the bank said it would sell up to $20 billion of a new hedge instrument to tame volatility that has battered Mexico's currency.
At Monday's auction, the central bank placed $200 million each in maturities of 30, 60, 101 and 178-days and $100 million each in 283 and 360-day maturities.
Juan Carlos Alderete, a strategist at Banorte in Mexico City, said the instruments, which are like non-deliverable forward contracts that pay in pesos, would help provide liquidity in longer maturities than were available in the market.
"This is important in the context of providing stability to this part of the market. But definitely we do not believe that this is going to be a game changer," he said, referring to the contracts' ability to curb peso volatility.
The Mexican currency weakened 0.6 percent to 19.611, in line with other Latin American currencies, as the U.S. dollar strengthened on concerns that an anti-European Union candidate may be elected France's next president.
Earlier in the session, it firmed as much as 0.3 percent to 19.435 per dollar, its strongest level since the day after Donald Trump's surprise victory in the Nov. 8 U.S. presidential election.
The peso has rallied since hitting a historic low on Jan. 11 above 22 per dollar, making it the top performing major currency so far this year. It surged last Friday after U.S. Commerce Secretary Wilbur Ross said a sensible trade deal with Mexico would help the peso.
Mexico's program so far is much smaller than a similar swap auction program in Brazil, where the central bank intervenes more frequently.
"It is just a cushion during the transition to the new equilibrium for the peso," said Benito Berber, an analyst at Nomura in New York, who doubted Mexico's program would go beyond the announced $20 billion.
Marco Oviedo, an economist at Barclays, said the more favourable mood around trade meant he doubted the peso would return to levels around 21 per dollar in the coming months.
But he said that further gains could be limited until there is more clarity on what could happen in U.S.-Mexico talks to renegotiate the North American Free Trade Agreement, which also includes Canada. (Reporting by Michael O'Boyle and Anthony Esposito; Editing by Paul Simao and Andrew Hay)