Oct. 15 (Bloomberg) — Mexico's peso fell as U.S. retail sales dropped the most in three years last month, signaling Mexico's largest trading partner is likely headed toward a recession.

The peso declined 3.5 percent to 12.738 per dollar at 9:44 a.m. New York time, from 12.3134 yesterday. The currency rose 6.9 percent Oct. 13, the biggest increase in 13 years, after a 14 percent decline last week.

"The release of very weak retail sales in the U.S. has a fairly profound impact on Mexico," said Lawrence Goodman, head of global emerging-market currency strategy at Bank of America Corp. in New York. High volatility in the peso "makes it difficult to envision a substantial inflow that would be requisite to push the peso higher."

U.S. retail sales fell 1.2 percent in September, more than forecast, following a 0.4 percent decline the prior month, the Commerce Department said today in Washington. The U.S. purchases about 80 percent of Mexican exports.

Banco de Mexico sold $8.9 billion of foreign reserves last week, including $6.4 billion on Oct. 10 alone, after the peso slid to a record low of 14.2927. The sales pushed down the country's foreign reserves to a one-year low of $75 billion, the central bank said yesterday.

The peso's decline has also been fueled by the tumble in oil prices. Crude oil dropped as low as 4.7 percent today to $74.94 per barrel in New York Mercantile Exchange trading, its lowest level in 13 months. It is down 48 percent from a record high of $147.27 reached on July 11. Oil accounts for about 40 percent of the Mexican government's revenue.

The yield on Mexico's benchmark 10 percent peso bonds due in 2024 rose 10 basis points, or 0.1 percentage point, to 9.01 percent. The bond's price fell 0.91 centavo to 108.36 centavos per peso, according to Banco Santander SA.