Latin American Currencies Struggle Amid U.S. Dollar Strength, Chile’s Peso Hits Two-Year Low

Latin American currencies faced a challenging week, with most set to close lower as the U.S. dollar continued to perform strongly, driven by inflationary pressures and expectations of prolonged higher interest rates in the U.S. The MSCI Latin American currencies index held steady at 2639.26 points, but was poised to decline by 0.3% for the week, marking its third consecutive weekly drop. Similarly, the regional stock index fell by 0.9%, nearing its lowest levels since 2020 and set for a fourth consecutive weekly decline, continuing its downward trend after ending 2024 more than 30% weaker.
Chile’s peso saw a notable drop of 1.2%, heading for its worst week since October and trading at its lowest point in over two years. The strength of the U.S. dollar, which remains near two-year highs, has weighed heavily on emerging market (EM) currencies and stocks. The dollar’s strength is bolstered by market expectations of a slower pace of interest rate cuts by the U.S. Federal Reserve, potentially exacerbating the outflow of capital from riskier assets in emerging markets.
In addition to the U.S. economic outlook, political uncertainty in the U.S. has further clouded prospects for EMs. The anticipated return of Donald Trump as U.S. president, along with his plans for substantial global import tariffs, has caused additional concerns, particularly for economies like Mexico and China. Analysts at Continuum Economics forecast that the U.S. dollar will strengthen in the first half of 2025 due to growth expectations, tax cuts, and trade policies. However, they predict a potential reversal in the second half of the year, as the dollar may become overvalued relative to other developed market currencies.
Mexico and Argentina: Diverging Economic Trends
Mexico’s peso weakened by 0.5% on the day and was on track to fall over 1.7% for the week. Despite this, the country’s seasonally adjusted jobless rate was recorded at a relatively low 2.7% in November. Argentina’s stock market, in contrast, showed resilience, with its main index rising by 0.6% on the day and poised to continue its impressive performance from 2024, when it surged over 172%. Argentina was set to close the week with a gain of more than 5%, making it the best-performing market in the region.
Brazil’s real, on the other hand, weakened by 0.4% against the dollar but was on track to post its first weekly gain in three weeks. Elsewhere, Chile’s peso and the Colombian peso faced notable declines, while the Argentine peso remained stable.
China’s Policy Moves and Impact on Latin American Markets
In other news, China’s central bank signaled its intention to cut banks’ reserve requirement ratios and interest rates at an appropriate time. This statement, made during a quarterly meeting of its monetary policy committee, had ripple effects in global markets, though the specific impact on Latin American currencies and stocks remained muted.
Key Market Data
- MSCI Emerging Markets Index: 1072.7 (+0.16%)
- MSCI Latin America Index: 1843.6 (-0.86%)
- Brazil Bovespa Index: 118,591.01 (-1.28%)
- Mexico IPC: 49,119.82 (-1.3%)
- Chile IPSA: 6700.17 (+0.27%)
- Argentina Merval: 2,710,648.9 (+0.557%)
- Brazil Real: 6.1751 (-0.38%)
- Mexico Peso: 20.6731 (-0.45%)
- Chile Peso: 1015.84 (-1.22%)
- Colombia Peso: 4345.5 (+0.63%)
- Peru Sol: 3.767 (-0.37%)
- Argentina Peso (Interbank): 1032.00 (unchanged)
- Argentina Peso (Parallel): 1185.00 (+2.53%)