Mexican inflation fighting supports the peso… Brazilian real heading the same way… Icelandic krona bounce will be short-lived…

The two best performing currencies as of late continued their assault on the dollar as both the Brazilian real (BRL) and Mexican pesos (MXN) climbed in value.

The Mexican peso increased to the highest against the U.S. dollar in almost six years on speculation the central bank will boost the country’s lending rate at its meeting next week. Last week, the Mexican central bank raised its inflation forecasts through 2010, increasing speculation that policy makers will lift interest rates. The central bank has raised the key lending rate twice by a quarter point since May 16, but inflation has continued to quicken. Expect one or two more interest rate increases this year, which will likely keep the pesos increasing versus the U.S. dollar.

Brazil’s real continues to be the best performing currency, as it rose to a nine-year high on interest rate speculation. Brazil’s central bank is very hawkish and they will keep the interest rate advantage over the United States. Unlike the past, Brazilian policy makers are making a concerted effort to address inflation. The central bank is ready to act “vigorously” for as long as necessary to bring inflation back to its 4.5% target by 2009, according to the minutes of its July 22-23 meeting. The bank sees domestic demand at the heart of inflationary pressures and isn’t blaming rising commodity prices alone like other central banks in the world. They are following the ECB instead of our FOMC and frontloading their interest rate increases in an effort to stay in front of inflation. The currency markets are rewarding their efforts with a continued rally for the real.

The Icelandic krona (ISK) finally had a weekly advance versus the dollar and the euro after the nation’s trade balance moved to a surplus in June. The currency advanced 2.8% versus the U.S. dollar last week, the first sustained rally since the beginning of July. The move helped push the currency below 80 krona/US$ but the credit crisis continues to hold down the interest rates which we are able to pay investors. I still think investors should take advantage of any increase in the value of the krona to exit this very volatile currency.

Source: A Week of Interest Rate Decisions