December 22, 2017 / 5:23 PM / 6 months ago

UPDATE 2-Mexico's peso falls to 9-month low on U.S. tax reform, inflation

(Updates with new peso level)

By Miguel Gutierrez and Christine Murray

MEXICO CITY, Dec 22 (Reuters) - Mexico’s peso hit a nine-month low on Friday, battered by higher inflation, a potential threat to investment from tax reform in the United States, and ruling party corruption scandals that could help a leftist leading the race for the presidency.

The peso fell more than 1 percent to 19.725 per dollar around 11:30 a.m. local time, its weakest level since mid-March. The currency is on track for its worst week since U.S. President Donald Trump was elected in November 2016.

The peso was still some way from the all-time lows it hit in January, just before Trump took office, and traders said volumes were expected to be low due to the end-of-year holidays.

Trump’s promise to rework or tear up the North American Free Trade Agreement (NAFTA) - the trilateral free trade bloc with Canada and Mexico - unless it provides more benefits to the United States, has weighed on the peso since last year, and analysts say that will continue to into 2018.

“With the level its at now, it’s likely that it will go to 20 pesos (per dollar), especially if Trump speaks out against NAFTA again,” Banco Base analyst Gabriela Siller said.

Inflation ticked up in the first half of December to 6.69 percent, above the 6.64 percent analysts had been expecting, keeping up pressure on the central bank to maintain high interest rates.

Persistent inflation and high interest rates are a toxic combination for President Enrique Pena Nieto’s Institutional Revolutionary Party (PRI) heading into an election year, with Mexicans due to vote for a new leader in July.

Adding to Mexico’s worries, Trump signed a sweeping tax reform bill into law on Friday, slashing the U.S. corporate tax rate to 21 percent for 35 percent. There are concerns in Mexico that this could mean the country will lose out on investment to its northern neighbor.

Analysts at CitiBanamex also pointed to a developing corruption scandal as another reason for peso weakness.

On Wednesday, the authorities arrested a former high-ranking official of the ruling Institutional Revolutionary Party, the latest in a string of allegations to batter the centrist party.

Alejandro Gutierrez, who was the adjunct secretary to the presidency of the PRI, is accused of participating in a scheme to funnel taxpayer money into political campaigns in the state of Chihuahua. He has rejected the allegations against him.

The scandal could boost leftist presidential candidate Andres Manuel Lopez Obrador, who is running on an agenda to fight inequality and corruption and has an 11-percentage point lead over rivals, according to a recent survey by polling firm Parametria. (Editing by Dave Graham; Editing by Tom Brown)

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