Latin American Markets Rattled by Firm US Dollar

A strong US dollar has sent shockwaves through Latin American markets, causing asset values to drop. The catalyst for this shift was a hotter-than-expected inflation reading from the US PCE index, which pushed expectations of another interest rate hike by the Federal Reserve.

As expected US rates tend to strengthen the dollar, making it more attractive for investors to put their money in US cash and bonds rather than emerging markets. This can be particularly challenging for Latin American countries, where foreign capital is crucial for economic growth.

The impact was felt immediately, with MSCI's Latin America equities index slipping 0.1% and its regional currency index falling 0.2%. However, not all markets reacted in the same way: Brazil's Bovespa rose 0.3%, while Mexico's benchmark added 0.4% for a sixth consecutive day of gains.

Despite these local successes, the firm dollar remains a concern for investors. When translated back into dollars, the regional ETFs and benchmarks may not show the same level of growth as reported locally. This gap can cool foreign inflows even if domestic markets continue to perform well.