MEXICO CITY (Reuters) - Mexico's peso surged on Wednesday to a more than one-year high, bolstered by growing confidence that U.S. President Donald Trump will not pull out of NAFTA, as well as a major oil discovery and dovish comments by U.S. Federal Reserve Chair Janet Yellen.
The Mexican currency MXN=D2 gained about 0.7 percent to 17.781 per dollar, a level not seen since May 2016. It has more than recovered from a plunge after Trump was elected and threatened to impose punitive tariffs on Mexican goods to protect U.S. industry.
Expectations that Trump will not shred the North American Free Trade Agreement have fed demand for the peso and helped make it the top-performing emerging-markets currency this year, with a 17 percent gain. On Wednesday it was 3 percent stronger than just before Trump unexpectedly won the election.
"None of the fears associated with Trump relative to Mexico have come anywhere near to fruition," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago. "Assuming you don't see a spike in U.S. yields or an absolute implosion in the price of oil, I'd say the probability is that the peso continues to strengthen."
Scalone said the peso could reach 16 per dollar, a level where he would consider selling. Strategists in a Reuters poll on average forecast last week that the peso would end 2017 at 18.5 per dollar.
Wednesday's peso gain stemmed partly from Premier Oil Plc's (PMO.L) discovery of potentially more than 1 billion barrels of oil off the coast of Mexico, a major victory for Latin America's No. 2 economy.
Emerging markets currencies also benefited after Yellen said U.S. interest rates would not have to rise much further to reach what the Fed considers a neutral rate. An increase in the spread between U.S. and Mexican interest rates could lure more traders to borrow dollars to buy Mexican peso debt.
At last week's G20 summit in Hamburg, Trump hailed progress on trade after meeting Mexican President Enrique Pena Nieto for the first time, while Mexico's government said it expected a general agreement on modernizing NAFTA by the end of 2017.
Reporting by Noel Randewich; Editing by Lisa Von Ahn