NEW YORK/LONDON, March 4 (Reuters) - Mexico's peso rose

against the dollar in a volatile session on Tuesday, as traders

priced the effect of newly imposed U.S. tariffs of 25% on

imports from Mexico.

The peso strengthened late in the session after U.S.

Commerce Secretary Howard Lutnick told Fox Business that

President Donald Trump will reach a middle ground with Canada

and Mexico on tariffs and an announcement to that effect was

expected on Wednesday.

Mexico's trade-dependent economy sends around 80% of its

exports to the United States. President Claudia Sheinbaum said

some Mexican agricultural exports like avocados could find other

destinations, adding she would announce Mexico's full response

on Sunday.

Investors rightly recognize that imposing 25% tariffs on

Mexico and Canada would be an act of economic self-sabotage for

the U.S. according to Alejo Czerwonko, chief investment officer

for emerging markets in the Americas at UBS Global Wealth

Management.

"Sheinbaum has been skilfully managing U.S. pressures," he

added.

Mexican stocks also staged a comeback, with the local

benchmark up 0.6% on the day after earlier touching its

lowest in five weeks. At its session low, the index fell over 2%

while the bounce back took it to a 1.2% gain.

The peso fell as much as 1.5% on the day to 21.002 per

dollar, the weakest since a tariff-related selloff in early

February. But the afternoon rally brought the currency back to

positive territory and it ended the day up 0.48% at 20.586 per

dollar.

The greenback fell across the board as investors weighed the

dollar support from tariffs against the economic impact in the

U.S., where stocks and bond yields also fell.

JPMorgan analysts said Tuesday they continue to believe

tariffs will be temporary, with an immediate price reaction on

the peso in a range from 2% stronger to 4% weaker.

The currency has lost a fifth of its value to the

dollar since last April, having been hit with both concerns over

U.S. trade and domestic political and constitutional changes.