Mexico's peso rose on Friday to a 2-1/2 week high and Brazil's real hit its strongest level in nearly four months as investors bet that the US Congress will reach an agreement to avert a devastating debt default. Riskier assets such as emerging market currencies could extend gains next week if US lawmakers put an end to the government shutdown and increase the US borrowing limit.
Failure to raise the limit could spur an unprecedented US debt default that could throw global markets into crisis. The Brazilian real firmed 0.15 percent to its strongest close since mid-June. Expectations that the central bank will raise interest rates more aggressively, increasing the allure of assets denominated in the local currency, also boosted the real.
Yields on Brazilian interest-rate futures edged higher the central bank will keep raising interest rates toward double digits. Mexico's peso gained 0.94 percent to 12.9830 per dollar, strengthening past the psychological 13-per-dollar level. The cost of dollars in Mexican pesos fell below its 50-day moving average, which could bode for further peso gains.
Yields on Mexican peso debt fell sharply, backed by bets that Mexico could cut its benchmark interest rate in October. While most economists expect the central bank to cut its main rate by 25 basis points to 3.5 percent on October 25, but some are starting to bet on a half-percentage point cut.