Latam FX set for biggest monthly gain since May as dollar loses steam

Currencies in Latin America were on track for their best monthly performance in eight months on Tuesday as the U.S. dollar tumbled from multi-decade highs on expectations the Federal Reserve will soon slow the pace of its interest rate hikes.

The MSCI's index for Latin American currencies (.MILA00000CUS) was 0.3% higher at 1935 GMT and was on track for its best month since May, outperforming the broader emerging market index (.MIEM00000CUS).

Investors were focused on a host of central bank rate decisions this week from developed market peers, with a Federal Reserve rate decision due on Wednesday.

"Massive inflows into EM assets so far this year show that investors are not deterred by the narrowing rate differentials," Natalia Gurushina, emerging markets fixed income economist at VanEck, said in a note.

The International Monetary Fund on Monday raised its output growth estimate on emerging markets for this year, with projections now showing the economic slowdown in the region may have bottomed out in 2022.

Brazil and Mexico, Latin America's largest economies, were both upwardly revised in their 2023 economic growth by 0.2 and 0.5 percentage point, respectively.

The real USDBRL, (BRBY) was up 0.8% while Mexico's peso USDMXN fell 0.3% against the dollar respectively.

Data showed Mexico's economic growth slowed to 0.4% in the fourth quarter amid tighter monetary conditions, but still ended 2022 in positive territory.

The Colombian peso USDCOP reversed early gains to fall 0.3% against the dollar, extending declines to the third straight session.

Still the currency of Latin America's fourth largest economy was on track for its biggest monthly gain since May last year.

The technical team of Colombia's central bank on Monday revised its inflation projection for this year to 8.7% from 7.1% previously, amid high prices.

Brazil's economic policy secretary Guilherme Mello said on Tuesday that discussions on changing inflation targets were not on the agenda of the Finance Ministry.

Currencies of top copper producers Chile USDCLP and Peru USDPEN added 1.4% and 0.1% respectively.

Latam stocks (.MILA00000PUS) rose 0.9%, with Argentina's MerVal index (.MER) up 3.9% and leading gains. Broader EM stocks EEFS fell 1.1%, but were still on track for a monthly gain.

"We think EM equities will generally struggle over the next few months as global growth concerns weigh on both earnings expectations and appetite for risk," wrote Capital Economics economists Filippos Papasavvas and Diana Iovanel in a note.

"But we forecast EM equities to recover thereafter, ending 2023 above their current levels."

Key Latin American stock indexes and currencies at 1935 GMT