Mexico peso firms, stocks rise as oil price dips

MEXICO CITY, July 16 (Reuters) - Mexico's peso firmed on Wednesday as a drop in oil prices helped global stock markets recover, emboldening investors to buy the peso currency ahead of a widely expected hike in domestic interest rates.

The peso <MXN=> MEX01 firmed 0.33 percent to 10.26 per dollar, while the benchmark IPC stock index .MXX gained for the first time in six days, rising 0.99 percent to 27,708.

In debt trading, long-term bond prices rose for the second day in a row as investors bet that Friday's expected hike by Mexico's central bank may be the last of the year.

Another large decline in crude prices CLc1 together with stronger-than-expected earnings at U.S. bank Wells Fargo & Co (WFC.N: Quote, Profile, Research) helped stocks recover after being battered since last week by fears about the health of U.S. financial institutions.

"The stock market is rallying and the dollar is somewhat weak, which is all good for the peso. At the same time you have expectations that the central bank will hike rates in two days," said Bertrand Delgado, an economist at IDEAglobal in New York.

Mexico's central bank is widely expected to raise its benchmark overnight rate by a quarter percentage point to 8 percent on Friday.

That would push the spread between U.S. and Mexican benchmark interest rates to 6 percentage points, making peso-denominated assets more attractive to investors.

In debt trading, the government's benchmark 10-year peso bond <MX10YT=RR> rose 0.765 of a point in price to bid 91.205, pushing its yield down 13 basis points to 9.15 percent.

The bond's yield had surged more than 160 basis points since April when inflation began accelerating faster than expected. Some investors are betting inflation may have peaked in June and that the bond market could be bottoming out.