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EMERGING MARKETS-Most Latam currencies rally as dollar retreats on fading Fed euphoria

·2 min read

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South African c.bank raises repo rate by 75 bps

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Mexico prices rise more than expected in early September

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Turkey's CBRT stuns with 100 bps rate cut, lira hits record low

(Updates prices)

Sept 22 (Reuters) - Latin American currencies rallied on Thursday, recovering from a weakness brought on by an aggressive U.S. Federal Reserve, with a bigger-than-expected inflation rise lifting Mexico's peso on hopes of a large interest rate hike this month.

As the dollar retreated from over two-decade highs, MSCI's index of Latam currencies rose 0.8%, with Mexico's peso up 0.5%.

Data from Mexico showed consumer prices in the country rose a more-than-expected 0.41% during the first half of September, reinforcing expectations of a rate hike this month.

"The stronger-than-expected inflation figure, coming alongside the hawkish Fed decision, means that we now think Banxico will raise rates by 75 bps to 9.25% next week," said Jason Tuvey, senior EM economist at Capital Economics.

"We also now expect more tightening in this cycle than before and think the policy rate will reach 10.50% by early next year, previously 10.00%."

Investors digested a central bank-heavy week that saw the Fed deliver its third 75 basis points (bps) hike of the year, signal more increases, and sound less hopeful about a soft landing for the U.S. economy.

Monetary authorities in England, Sweden and Switzerland all hiked rates in their fight against inflation, while Japan intervened to support the yen amid easy monetary policy there.

In emerging markets, Brazil's central bank kept its policy rate unchanged at 13.75% after hiking by 1.175 bps since last March, while Turkey continued its unconventional policy, cutting rates despite inflation at 80%, and sending the lira to new lows. South Africa's rand gave up gains made after an expected 75 bps hike, last down 0.9%.

Brazil's real, which had inched lower earlier in the session, rose 0.8%, while higher oil prices lifted Colombia's peso 1%. Chile's currency underperformed as copper prices fell.

The outlook for risk assets remains weak as global central banks ramp up their fight against inflation, willing to tolerate some level of hit to economic growth, and buoying the dollar.

Emerging market currencies have lost around 7.5% so far this year, in what could their worst year on record. Emerging market stocks have shed 25% and are on track for their sharpest yearly decline since the global financial crisis shook markets in 2008. (Reporting by Amruta Khandekar, Susan Mathew and Anisha Sircar in Bengaluru; Editing by Andrea Ricci and Jonathan Oatis)