Latin American currencies struggle on Fed rate signals; Brazil's real rises
Emerging market central banks rush to prop up currencies
Mexico's central bank expected to cut rates by 25 basis points
El Salvador reaches agreement with IMF for $1.4 billion loan
Latin American stocks down 0.2%, currencies fall 0.4%
By Lisa Pauline Mattackal
Dec 19 (Reuters) -Most Latin American currencies lost ground on Thursday after investors were jolted by the U.S. Federal Reserve's signals of fewer interest rate cuts next year, though Brazil's real rebounded on support from the country's central bank.
The real BRBY was up nearly 1.4% against the U.S. dollar at 10:15 a.m. EST (1515 GMT) after the central bank of Latin America's largest economy unloaded $8 billion in spot dollar auctions. The move was the Brazilian central bank's latest attempt to shore up the struggling currency after it touched an all-time low in the face of a stronger dollar and a deepening financial crisis sparked by fiscal policy concerns.
As expected, the U.S. central bank trimmed borrowing costs on Wednesday by 25 basis points. However, Federal Reserve Chair Jerome Powell said more reductions hinge on further progress in lowering stubbornly high inflation and policymakers' projections show they expect fewer cuts in 2025.
Powell's comments combined with the policymakers' projections sent the dollar and U.S. Treasury yields higher and sparked a selloff in emerging market assets.
MSCI's index of Latin American currencies .MILA00000CUS was down 0.2% on Thursday, while the broader emerging market currencies index .MIEM00000CUS was at a four-month low.
Mexico's central bank is expected to cut interest rates by 25 basis points later on Thursday. The peso MXN= dipped 0.3% against the dollar.
"In contrast to the sharp tightening in policy rates in Brazil, Mexico's Banxico is expected to ease rates by a further 25 bps to 10.0%, with inflation still well-contained, and economic growth sluggish, and threatened by Trump 2.0 tariffs," said Marc Ostwald, global strategist at ADM Investor Services International.
"The latter ... may well be touted as grounds for caution on further rate cuts."
Brazil's central bank bumped up its economic growth forecast for this year and 2025, but still sees above-target inflation until 2026. The real remains one of the worst performing emerging market currencies this year, down over 21% versus the dollar.
The change in the Fed's outlook will be a hurdle for emerging markets next year, with higher rates denting the appeal of riskier emerging market assets and the dollar's rise likely to drive foreign capital out of their markets and weigh on currencies.
The Czech crown EURCZK= was little changed against the euro after its central bank joined other central European peers in pausing interest rate cuts, as expected, in the face of lingering inflation pressures.
The currencies' declines also sent other emerging market central banks rushing to prop up their currencies.
Dollar bonds for riskier emerging economies also came under pressure, with those in Nigeria, Egypt and Kenya falling around 2 cents on the dollar earlier on Thursday.
El Salvador reached a staff-level agreement with the International Monetary Fund on a new 40-month loan program for about $1.4 billion. It is contingent on the implementation of agreed reforms, including the government's handling of bitcoin.
The country's dollar bonds were little changed.
MSCI's index of Latin American stocks .MILA00000PUS was down 0.2%.
Key Latin American stock indexes and currencies at 1515 GMT:
MSCI Emerging Markets .MSCIEF | 1082.99 | -1.12 |
MSCI LatAm .MILA00000PUS | 1888.05 | -0.10 |
Brazil Bovespa .BVSP | 121257.48 | 0.4 |
Mexico IPC .MXX | 49986.72 | 0.04 |
Chile IPSA .SPIPSA | 6678.32 | -0.79 |
Argentina Merval .MERV | 2522662.29 | 0.065 |
Colombia COLCAP .COLCAP | 1379.37 | 1.39 |
Currencies | Latest | Daily % change |
Brazil real BRL= | 6.1712 | 1.88 |
Mexico peso MXN= | 20.4351 | -0.42 |
Chile peso CLP= | 995.66 | -0.24 |
Colombia peso COP= | 4395.75 | -0.6 |
Peru sol PEN= | 3.7428 | -0.29 |
Argentina peso (interbank) ARS=RASL | 1022 | 0.048923679 |
Argentina peso (parallel) ARSB= | 1175 | 2.553191489 |
Emerging Market equities: Taiwan and India lead, Latin America lags https://tmsnrt.rs/3Dy0FoG
Reporting by Lisa Mattackal in Bengaluru and Duncan Miriri in Nairobi; Editing by Paul Simao
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