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EMERGING MARKETS-Latam FX, stocks notch 2-month highs as dollar slides on cooling rate hike bets

·3 min read

* Latam FX index hits highest June 10 * Cooling U.S. rate hike bets boost EM * Eyes on Mexico rate decision this week (Updates prices) By Susan Mathew and Sruthi Shankar Aug 10 (Reuters) - A gauge of Latin American currencies touched two-month highs on Wednesday after U.S. inflation rose less that expected in July, easing bets that the Federal Reserve will need to maintain its current pace of hikes. The MSCI index of Latam FX jumped 1.1% to touch its highest since June 10 as the dollar was slammed after the data showed U.S. consumer prices were unchanged in July due to a sharp drop in the cost of gasoline. Money market traders quickly slashed bets the central bank would enact a third straight 75-basis-point hike at its September policy meeting, and instead would opt for a half-point increase. Brazil's real strengthened to 5.03 per dollar for the first time in almost two months, and was last trading at 5.08 level. The Mexican peso, meanwhile, broke past 20 per dollar for the first time since late June, firming to a session high of 19.90. It was last seen at 20.03. "The (U.S) tightening cycle is unlikely to end soon, but the Fed may opt for a smaller rate hike if there is more evidence that inflationary pressures have eased," said Piotr Matys, senior FX analyst with InTouch Capital in London. "The selling pressure on the EM currencies should ease accordingly. When markets have sufficient conviction that rates will not rise further in the U.S., we may witness a proper wave of capital inflows into EM." The prospect of aggressive U.S. interest rate hikes has spurred capital outflows from developing economies but Latin American markets have remained far more resilient compared with their developing world peers due to the exposure to commodities that have surged this year. Crude exporter Colombia's peso rose 1.8% and copper producer Chile saw its peso climb 1.7%, extending gains to a third straight session as commodities were boosted by a weakening dollar. As Wall Street rallied, Latam stock markets climbed 2.3%, also touching a two-month high. Argentina on Tuesday performed a voluntary debt swap for some 2 trillion pesos ($15 billion) for bonds maturing over the next 90 days, the government said, the first important test for new Economy Minister Sergio Massa. The move relieves pressure on Argentina's public finances by swapping short-term debt. Meanwhile, traders told Reuters that Argentina's central bank is likely to raise its benchmark interest rate by 600 basis points this week to tackle inflation. Key Latin American stock indexes and currencies: Latest Daily % change MSCI Emerging Markets 998.86 -0.28 MSCI LatAm 2258.40 2.27 Brazil Bovespa 110167.40 1.4 Mexico IPC 47779.51 1.14 Chile IPSA 5272.45 0.69 Argentina MerVal 122286.10 0.3 Colombia COLCAP 1314.08 -0.61 Currencies Latest Daily % change Brazil real 5.0837 0.01 Mexico peso 20.0275 0.95 Chile peso 887.5 1.74 Colombia peso 4268.13 1.78 Peru sol 3.8857 0.82 Argentina peso (interbank) 134.0000 -0.11 (Reporting by Susan Mathew and Sruthi Shankar in Bengaluru; editing by Mark Heinrich and Alistair Bell)