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Strong dollar knocks Latam FX lower after Fed

(Updates throughout with closing prices) By Sruthi Shankar July 31 (Reuters) – Latin American currencies weakened against a strong dollar on Wednesday after the U.S. Federal Reserve cut interest rates as expected, but chief Jerome Powell’s comments disappointed investors who had hoped for a more dovish stance. In a statement at the end of its two-day policy meeting, the Fed said it had decided to cut rates by 25 basis points “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.” However, Powell’s comments that Wednesday’s rate cut was different from the start of a lengthy series of rate cuts quashed expectations the U.S. central bank will embark on an easing cycle. Latin American currencies declined, in-line with their emerging market peers. The Brazilian real, which rallied 1% ahead of the Fed statement, was down 0.43%. The Mexican peso , the Chilean peso and the Peruvian sol fell between 0.2% and 0.6%. Simon Harvey, an FX analyst at Monex Europe pointed to Powell striking a more hawkish tone at the news conference hitting emerging market currencies. “The market was aggressively pricing in a dovish Fed, and given that, there is plenty of upside for U.S. yields and the dollar,” said Harvey. Emerging markets have seen large inflows this year on hopes major central banks will turn to monetary policy easing to combat a global growth slowdown. Brazil’s central bank is also expected to come out with its interest rate decision at 2100 GMT. Economists polled by Reuters expect the Banco Central to cut its benchmark interest rate to a record low, although economists are divided on the pace and depth of an easing cycle. “The market is pricing 25-50 basis point rate cut, but at the same time the expectations are relatively aggressive when it comes to the one-year horizon,” said Harvey. Brazil, Latin America’s largest economy, is struggling to emerge from a crippling recession, with the government focused on passing through Congress a pension overhaul it hopes will prop up public finances and kick-start growth. Stocks in Sao Paulo fell about 1% while those in Mexico City shed 0.6% after data showed the economy narrowly avoided slipping into recession during the first half of 2019. The Mexican government’s recently announced $25 billion stimulus package is likely to have a limited impact on economic growth, an analyst for credit ratings agency Moody’s said, adding she sees no reason to change growth forecasts. Colombia’s peso was an outlier, gaining 0.6% after seven days of losses, while the IGBC index moved a touch higher. Colombia’s government earlier this week presented an $84 billion proposal for its 2020 budget to Congress, and on Wednesday said it has proposed increasing the amount of so-called TES treasury bonds it will issue in 2020 by 7 trillion pesos ($2.12 billion). Latin America’s fourth-largest economy has a fiscal deficit goal of 2.1% of gross domestic product for 2020, considered key to maintaining its current credit ratings. Key Latin American stock indexes and currencies at 1947 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1034.30 -0.85 MSCI LatAm 2821.76 -1.16 Brazil Bovespa 101947.62 -0.96 Mexico IPC 40924.65 -0.57 Chile IPSA 4988.13 -0.26 Argentina MerVal 42188.83 -0.646 Colombia IGBC 12780.98 0.32 Currencies Latest Daily % change Brazil real 3.8065 -0.43 Mexico peso 19.1380 -0.39 Chile peso 703.1 -0.63 Colombia peso 3278.43 0.54 Peru sol 3.304 -0.21 Argentina peso (interbank) 43.8750 0.22 (Reporting by Sruthi Shankar in Bengaluru Editing by Chris Reese)

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