Sept. 4 (Bloomberg) -- Mexico's peso declined to a three- month low as oil, the country's biggest export, sank to near its lowest in five months.

``A lower price of oil is not beneficial for the Mexican peso,'' said Mauro Roca, a New York-based Latin America market strategist at Lehman Brothers Holdings Inc.

The peso dropped 1.2 percent to 10.5225 per dollar at 5 p.m. New York time, from 10.3952 yesterday. It earlier touched 10.5352, the weakest level since May 12.

Crude oil for October delivery fell 1.6 percent to $107.56 a barrel on the New York Mercantile Exchange. It touched $105.46 on Sept. 2, the lowest level since April 4. Oil, which funds more than a third of Mexican government spending, has slid 27 percent from a record high of $147.27 on July 11.

``It's slower oil prices,'' said Gerardo Margolis, vice president of foreign exchange and money markets at TD Securities Inc. in Toronto. ``On the positive side, there is still a very attractive carry accompanying the U.S. and Mexico interest rates.''

Banco de Mexico raised its target lending rate in August by a quarter-percentage-point to 8.25 percent. The U.S. Federal Reserve's benchmark rate is 2 percent. The difference between the rates is the widest since 2005.

The peso will weaken to about 10.50 per dollar by year-end, Margolis said. The median forecast of 19 economists surveyed by Bloomberg News is for the peso to reach 10.25.

The peso has declined 6.3 percent in the past month, paring its advance this year to 3.6 percent. Only the yen, up 4.4 percent, and the Brazilian real, up 3.6 percent, have gained more this year among the most-active currencies.

Yields on Mexico's 10 percent bond due in December 2024 rose 6 basis points, or 0.06 percentage point, to 8.46 percent. The bond's price fell 0.62 centavo to 113.54 centavos per peso, according to Banco Santander SA.

Mexico's consumer confidence index increased to 89.6 last month from 88.4 in July, the National Institute of Statistics said. Economists surveyed by Bloomberg News forecast the index would decline to 87.2.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net

Last Updated: September 4, 2008 17:48 EDT