Most Latin American currencies extended their slide on Monday due to persistent concerns over rising US interest rates, but the Argentine peso firmed for a second day in the wake of a sharp rate hike. Currencies from Chile, Mexico, Brazil and Colombia slipped between 0.3 and 1.2 percent.
Emerging-market currencies have taken a hit in recent weeks as traders shed high-yielding assets on expectations that accelerating US inflation and a widening fiscal deficit could force the Federal Reserve to tighten policy faster. The Argentine peso, by far the worst-performing currency in the region this year, edged up for a second straight day of trading, supported by decisive central bank action.
Argentine policymakers jolted the country's battered currency back to life on Friday with a set of announcements intended to restore confidence in the president's ability to deliver sustainable growth while cutting inflation. The central bank sharply raised its monetary policy rate to 40 percent, sparking a 5.1 percent jump in the local peso to 21.88 per US dollar. The government also soothed investors' nerves by cutting its fiscal deficit target to 2.7 percent of gross domestic product.
The 40 percent rate "can temporarily support an exchange rate of 21.6, but the heavy positioning, loss of credibility and reputational cost make 22 (pesos) a new fair rate in our view," BTG Pactual economists said in a note.
Argentina's new policies were the strongest reaction yet in Latin America to capital outflows that are forcing policymakers to take action.
Brazil's central bank has stepped up sales of currency swaps, which function like sales of dollars for future delivery, since the Brazilian real touched the milestone of 3.55 per dollar for the first time since June 2016.
Brazil's currency has still lost 6.6 percent in 2018, the second-largest decline in Latin America, weighed down by fears about the most hard-to-predict presidential race in decades.
Economists at Nomura Securities said in a report that currency investors are betting that the likely winner of this year's elections will not pursue market-friendly reforms to curb a growing fiscal deficit.
"The market appears to be pricing in a 25 percent probability of a reformist victory in the election, a percentage that we find reasonable right now," the report said.
"We believe the market will continue to trade poorly unless there is a meaningful increase in the likelihood of a 'reformist' winning the election. Unfortunately, we are likely still months away from gaining any clarity on this."
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