Nov. 6 (Bloomberg) -- Mexico’s peso fell, capping the biggest weekly decline since September, on rising unemployment in the U.S. and investor concern the country won’t be able to stave off its first credit-rating downgrade since 1995.

The currency lost 1 percent to 13.4098 per U.S. dollar at 5:04 p.m. New York time, from 13.2794 yesterday. The peso dropped 1.6 percent this week, the worst performer against the dollar among the 16 major and 26 emerging-market currencies tracked by Bloomberg.

“Mexico is just really out of favor at the moment with investors and it seems that the strong link to the U.S. continues to be a big problem,” said Beat Siegenthaler, chief emerging-market strategist at TD Securities Ltd. in London. “As long as there’s skepticism there, it seems that” the peso is not going to gain.

The unemployment rate in the U.S. soared to a 26-year high of 10.2 percent in October and employers cut more jobs than forecast. Payrolls fell by 190,000 workers last month, compared with a 175,000 drop anticipated by the median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed. The jobless rate gained from 9.8 percent in September and exceeded 10 percent for the first time since 1983.

The U.S. buys 80 percent of Mexican exports.

Sales Tax

The opposition-controlled Congress approved on Nov. 1 a permanent 1 percentage-point increase in the sales tax to 16 percent after rejecting President Felipe Calderon’s proposal for a 2 percent consumption tax that would have generated more than double the revenue. Lawmakers are discussing the spending side of the budget, which is due to be approved on Nov. 15.

“The sentiment is that at least there will be one downgrade,” said Pedro Tuesta, senior economist for Latin America at 4Cast Inc. in New York. “The chances exist because while there was an improvement in the fiscal account there, you can still see Mexico vulnerable to another crisis.”

Standard & Poor’s and Fitch Ratings say they may downgrade Mexico should the government fail to contain the deficit and offset a drop in oil production. Analysts from both companies said this week they are waiting to see the spending side of the 2010 budget before making a decision on the country’s rating.

‘In Trouble’

Falling oil production puts Mexico’s fiscal accounts “in trouble,” Tuesta said. Revenue from crude funds 38 percent of the Mexican government’s budget.

State-owned Petroleos Mexicanos, Latin America’s largest oil producer, said crude output in September dropped 4.5 percent from a year earlier to 2.599 million barrels a day.

Mexico’s dependence on oil is a “structural weakness,” Finance Minister Agustin Carstens said yesterday at the Bloomberg Economic Forum in Mexico City.

Lisa Schineller, an analyst at S&P, said yesterday lawmakers approved a “weaker version” of Calderon’s tax proposals and the country continues to face “medium-term fiscal challenges.”

The peso is the only one of the 16 major currencies tracked by Bloomberg that has fallen this week against the dollar. It has had the worst performance in the past three months among the 26 major currencies tracked by Bloomberg, falling 2.8 percent.

Executives from Mexico’s largest companies, Kimberly-Clark de Mexico SAB, America Movil SAB and Citigroup Inc.’s local unit, said yesterday tax increases President Felipe Calderon pushed through Congress will likely allow the country to avert a credit-rating downgrade.

Yields on Mexico’s 10 percent bond due December 2024 fell five basis points, or 0.05 percentage point, to 8.26 percent, according to Banco Santander SA. The price rose 0.42 centavo to 114.96 centavos per peso.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Tian Huang in New York at thuang57@bloomberg.net.

Last Updated: November 6, 2009 17:11 EST