Latam FX firms, Peru sol stabilizes after rout

By Michael O’Boyle

MEXICO CITY (Reuters) – Major Latin American currencies firmed Tuesday as the U.S. dollar broadly weakened and Peru’s sol found support after a steep slump following the election of a left-winger to the presidency.

The dollar index fell against other currencies after a senior Chinese currency regulator warned about the risks of investing too heavily in dollar-denominated assets.

Traders said China’s desire to diversify its currency holdings has been a theme for some time, but they noted there was little other major news directing currency markets.

Latin American currencies snapped back after steep losses in the previous session. They were helped by a similar rebound in U.S. stocks that supported a bid for riskier assets, like emerging market currencies.

Brazil’s real bid 0.38 percent stronger at 1.575 per dollar, heading toward its strongest since the start of May.

Mexico’s peso firmed 0.33 percent to 11.7140 per dollar, bouncing back from a three-week low, while Chile’s peso bid up 0.36 percent to 466 per dollar.

Global markets and Latin American currencies have been hurt recently by fears a sovereign default in Europe could send shockwaves through the global financial system, as well as concerns about slower global growth.

But investors have been snapping up Latin American currencies when they weaken.

Data last Friday showed the U.S. unemployment rate unexpectedly rose in May, backing views the Federal Reserve will hold interest rates at zero percent well into 2012.

Low U.S. interest rates boost the appeal of higher-yielding Latin American debt. Brazil is expected to raise its benchmark interest rate to 12.25 percent this week, one of the highest rates in the world.

“The weaker economic data in the U.S. just points to rates continuing to be low for the foreseeable future,” said Jorge Perez-Duarte, a managing director for emerging markets at TD Securities in Toronto.

“We will need to see a bigger drop in equities due to fears of a slowdown in the U.S. economy to really put a brake on this dollar depreciation,” Perez-Duarte said.

However, investors seem more cautious, he added.

Mexico’s peso has found support amid recent losses. It is not seen heading back toward a 2-1/2 year high hit at the beginning of May as long as weak U.S. data bodes poorly for its exports, traders said.

Peru’s sol bid 0.14 percent firmer at 2.7870 per dollar after it slumped by the most in more than two years in the previous session on left-winger Ollanta Humala’s victory in Peru’s presidential election on Sunday.

Investors fear Humala could target foreign firms and scare off investment. Analysts say markets could continue to be volatile as the market waits for President-elect Humala to name his finance minister and central bank chief.

If Humala makes good on promises to appoint market- friendly candidates to key economic posts, the sol could find further support, analysts said.

“It will still be very choppy the next few days or weeks, until we have a clearer picture of what Humala is really about,” Perez-Duarte said.