Currencies in Latin American emerging markets briefly hit a one-month high on Wednesday, as the dollar weakened and U.S. Treasury yields eased after a closely watched U.S. inflation report.
The MSCI index of LatAm currencies (.MILA00000CUS) touched its highest level since Dec. 12, and was last flat at 1516 GMT. Meanwhile, a stocks measure (.MILA00000PUS) jumped 1.1% to its highest in more than a week.
The dollar fell to its lowest in a week, after a report showed core U.S. inflation rose less than expected in December, prompting traders to increase bets on the extent of interest rate cuts by the Federal Reserve this year.
Yields on U.S. Treasury notes, which soared after robust jobs data last week sparked a U.S. bonds sell-off, were lower across the board. Those on the benchmark 10-year bond dipped to a near one-week low.
“Even though talk of Fed cuts has died down because the U.S. has a very strong economy, the disinflation means that the Fed could choose to slash borrowing costs and not affect prices as it is usually feared with “dovish” monetary policy,” said Juan Perez, director of trading at Monex USA. “Had inflation gone up higher than estimated, the buck would have jumped.”
Perez also said investors were relieved as the indication of an easing in prices before Donald Trump’s potential tariff policies could be implemented. Among Latin American economies, Mexico is expected to take the biggest hit from such policies.
On the day, Mexico’s peso gained 0.2%.
The Brazilian real pared initial gains to trade flat against the dollar, after hitting its highest since Dec 16. Statistics showed services activity fell more than expected in November, in the latest sign of a cooling economy.
Brazil’s tight fiscal conditions and loose government spending have worried investors internationally, making the real the worst performing currency among major Latin American peers in 2024.
However, analysts see greater scope for the currency to strengthen, and both the real and the Mexican peso were set for their third session of gains against the dollar.
The Argentine peso was among the only major currencies that was flat to lower against the dollar. The South American country’s central bank said it will slow the rate of the local peso’s devaluation. The Merval stock exchange was up 0.4%.
Stock indexes in Mexico and Brazil were up 0.5% and 1.1% respectively.
The currency in Chile also strengthened 0.2%, while Columbia’s MSCI Colcap and Chile’s S&P’s IPSA CLP index were up 0.5% and 0.8% respectively.
