(Updates with peso movements, investor comments) MEXICO CITY/LONDON, June 7 (Reuters) - Mexico’s peso strengthened to a near-three week high on Monday after midterm elections confirmed President Andres Manuel Lopez Obrador’s MORENA party as the strongest force in the country, but with a reduced majority. Markets had been watching out for Lopez Obrador retaining his party’s supermajority, which would have allowed him to push through more wide sweeping changes, or he could lose his majority in congress altogether. Luis Gonzali, co-director at Franklin Templeton Investments in Mexico, said the loss of support in Congress could lead to short-term volatility in bonds and exchange rate. But checks and balances strengthened while MORENA still has certain control. “The results are positive for Mexico’s risk outlook,” he added. The peso gained as much as 1.1% to 19.7382 to the dollar, making the currency an outlier among many emerging market currencies which were treading water against a steady dollar. The gains have seen the currency turn positive on the year, now up 0.6% in 2021. Meanwhile, the spread of Mexico hard-currency bonds over safe-haven U.S. Treasuries, as measured by the JPMorgan EMBI global diversified index, held steady at 336 bps. Mexico’s election result was positive for institutional stability, agreed Gustavo Medeiros, deputy head of research at emerging market-focused fund manager Ashmore Group. “Not losing by a large magnitude also means that he shouldn’t U-turn on his strategy, therefore the commitment to tight fiscal policies should remain, which is positive from a creditworthiness perspective and it’s something that Mexico investors have been happy about since (Lopez Obrador) took office,” said Medeiros. Carlos de Sousa, a manager of emerging market debt portfolios at Vontobel Asset Management, also saw lower risk and more stability ahead. “Some of his populist or more controversial measures will probably not materialize, so it lowers the risks,” he added. The loss of the supermajority meant Lopez Obrador would struggle to make institutional amendments which were an important part of the fourth transformation, meaning his push for change would be “stuck in a low gear.” “It is also good for ESG,” he said, adding that Lopez Obrador was not seen as particularly green in his policies. (Reporting by Karin Strohecker and Tom Arnold in London, Stefanie Eschenbacher and Miguel Angel Gutierrez in Mexico City Editing by Peter Graff and Jonathan Oatis) Our Standards: The Thomson Reuters Trust Principles.