Brazil's real slid 1.3% on Tuesday, extending its plunge after the annulment of criminal convictions against a former president, while most other Latin American currencies firmed against a weaker dollar with Mexico's peso up more than 1%.
The real fell to 5.85 per greenback after slumping more than 3% last session as the annulment of cases against former leftist President Luiz Inacio Lula da Silva put him on track to run in 2022 presidential elections, spurring investor worries about President Jair Bolsonaro's response.
"The fear is that, with Lula's specter hanging over his re-election, Bolsonaro could act even more erratically and take populist actions that compromise Brazil's fragile fiscal situation," said Victor Beyruti, an economist at Guide Investimentos.
Bolsonaro's recent actions to replace state-oil firm Petrobras's chief executive and threats to interfere in other sectors of the economy have made investors wary about Brazilian assets. Add to that pressure on emerging market assets from rising US yields, the real is one of the worst performing EM currencies so far this year - down about 11%.
"The Lula story is certainly a bucket of cold water for those attempting to be bullish with Brazil," Citi Research strategists said, as it gives fresh legs to the multi-year polarization trend in Brazilian politics.
"After the initial impact of the (annulment) is absorbed, the reform agenda will remain relevant ... and will still be important drivers of price action this year. We believe there is room for further underperformance in Brazil asset prices."
With US Treasury yields stabilizing and Wall Street's stock indexes opening higher, Sao Paulo's Bovespa stock index rose 0.2%, after sinking 4% on Monday.
The broader MSCI index of EM stocks is on the cusp of entering correction territory, having fallen 9.6% from this year's high hit in February.
Mexico's peso jumped 1.2% against a weaker dollar after data showed annual inflation in the country accelerated to its highest rate in four months in February due to a rise in energy costs, but stayed within the central bank's target range.
"This trend has further to run in the coming months which, alongside the recent downward pressure on the peso, suggests that Banxico will refrain from further monetary easing from here," said Capital Economics' Latam economist Nikhil Sanghani.
The dollar's weakness saw Chile's peso, closely aligned with copper prices, rise 0.4% despite a slip in prices of the red metal.