By Anthony Harrup 

MEXICO CITY -- The Mexican peso continued losing ground against the U.S. dollar in the third quarter and faces further volatility in the fourth amid the looming U.S. presidential election and a possible interest-rate increase by the Federal Reserve.

The peso was quoted in Mexico City late Friday at 19.4030 to the U.S. dollar, according to Infosel, stronger than Thursday's 19.4810 close but down 5.9% from the end of June. A combination of global and local factors have led to an 11% loss for the currency so far this year.

Uncertainty about U.S. interest rates, concerns about economic growth and the possibility that Donald Trump could win the U.S. election all contributed to the peso hitting new lows against the dollar in September, and the volatility is likely to continue, said Eduardo Ontiveros, head currency trader at Grupo Financiero Interacciones.

From now until November, the peso will remain "the natural hedge" for risk associated with the U.S. election and "a thermometer of the U.S. election polls," Mr. Ontiveros said.

The peso recovered from a record low in the wake of Monday's first U.S. presidential debate, as Democratic candidate Hillary Clinton was widely seen as the winner, although nervousness about a possible Trump election victory is expected to continue to buffet the currency.

Mr. Trump has said he will expel illegal immigrants from the U.S., build a wall along the U.S.-Mexico border to keep migrants out, and renegotiate the North American Free Trade Agreement. In the debate, he said Mexico was stealing U.S. jobs and Nafta was the worst trade deal ever signed by the U.S.

Those positions are negative for Mexico, which sends four-fifths of its exports to the U.S., and last year received close to $24 billion in remittances from Mexicans working in the U.S.

Continued peso weakness and the risk it poses for the Bank of Mexico's 3% inflation target led the central bank on Thursday to raise interest rates for the third time this year, although a number of analysts doubted the higher rates would do much to strengthen the peso in the near term.

"The challenge is that today there seem to be plenty of near-term risk events that are likely to keep policymakers on edge, principally the U.S. election and uncertainty about the Fed," Morgan Stanley said in a report.

In an interview Friday with Mexico's Radio Fórmula, Bank of Mexico Gov. Agustín Carstens said the peso is undervalued given the country's economic fundamentals, particularly since the government has proposed further budget cuts for 2017 to curtail growing public debt and the central bank has raised interest rates again.

The central bank also acknowledged the risk the U.S. election poses for the peso. Mr. Carstens noted that Mrs. Clinton has said she would like to see changes in Nafta and doesn't support the Trans-Pacific Partnership, a much broader trade agreement.

But there are "different categories of storms," he added. "The scenario for Mexico is much better in the event we had Mrs. Clinton as president" in the U.S.

Write to Anthony Harrup at anthony.harrup@wsj.com<mailto:anthony.harrup@wsj.com>

(END) Dow Jones Newswires

September 30, 2016 17:26 ET (21:26 GMT)