Latin American currencies weakened on Monday as the dollar held steady ahead of this week's Federal Reserve meeting, with Mexico's peso extending declines following an economic contraction in the region's second-largest economy.

Data last week showed Mexico's first economic contraction since a recovery began from the coronavirus pandemic, posing a challenge to the central bank's monetary policy tightening cycle amid stubbornly high inflation, which analysts see taking precedence.

The peso, which fell 1.8% last week, slumped another 1.1% to lead losses among regional peers, extending declines to a fifth straight session.

"Mexico faces a more challenging outlook as the economy slows heading into 2022 ... Banxico will continue to hike rates as core inflation remains under pressure, adding yet more downside risks for growth ... political risks will remain elevated, further clouding the outlook for 2022," emerging market economists at TS Lombard said.

Brazil's real slips on concerns about economic growth

COVID-19 vaccine rollouts and the trajectory of the virus are other factors to be watched, they said. "That said, external demand will still provide a key boost to the economy and strong remittances will continue to support domestic consumer spending."

Brazil's real fell 0.4%, in line with broader EM peers, with all eyes on the Fed's meeting on Tuesday and Wednesday when the US central bank is expected to announce the start of a reduction in its bond purchases and perhaps hint at the timeline for future interest rate hikes. The dollar traded steady on Monday.

Markets in Chile, Colombia and Peru were closed for local holidays.

Among stocks, Brazilian fast food chain operator BK Brasil Operacao e Assessoria a Restaurantes soared 7.6% after it announced it had canceled an agreement with private equity firm Vinci Partners to acquire Domino's Pizza Brasil .

Brazil's Bovespa index jumped 1.6%, boosted by financials and energy companies, with oil firm Petrobras rising 2.8%.

Brazilian President Jair Bolsonaro said on Monday that dealing with high fuel prices in the country is his top priority right now, adding that he sees the privatization of Petrobras as an "ideal" move.