EMERGING MARKETS-Japan nuclear crisis hits Latan currencies

Tue Mar 15, 2011 5:50pm EDT

* Region's currencies hit by global sell-off of risk

* Japanese investors in region seen holding tight

* Mexican peso sheds 0.9 pct, Brazil real 0.3 pct

By Michael O'Boyle

MEXICO CITY, March 15 (Reuters) - Japan's nuclear crisis hit Latin American currencies on Tuesday, but a pledge of low interest rates by U.S. Federal Reserve promised to anchor the appeal of Latin American debt.

Investors piled into assets that they perceived to be a safehaven, like U.S. Treasury bonds, amid fears that radiation from earthquake-damaged nuclear plants could reach Tokyo.

Mexico's peso -- the most liquid and easily settled currency in the region -- slumped early in the session to lows not seen since May 2010 but then snapped back to trade below the key 12-per dollar level after the U.S. Federal Reserve stuck with its ultra-loose monetary policy and said the U.S. economy was gaining traction. For details, see [ID:nN15230117]

Low U.S. interest rates have fueled big bets on Latin American currencies like the real, since Brazil is offering among the highest interest rates in the world.

"Japan will end up giving the Fed even more room to keep interest rates down," said Alejandro Martinez, a strategist at HSBC in Mexico City.

Investors have been taking advantage of low interest rates in the developed world to borrow in currencies like the dollar and buy higher-yielding Latin American debt, pocketing the difference.

The yen rose broadly on Tuesday on expectations Japanese insurers and companies will repatriate funds to help pay claims and reconstruction costs. However, Latin America was seen less vulnerable to redemptions by Japanese investors than other currencies.

"There was panic in the morning, but I think the people are becoming calmer about what could be the effect of flows in Mexico, which will not be affected much," Martinez said.

Japanese retail investors have been behind much of the flows pumped billions into Latin America to take advantage of the region's high interest rates, analysts said.

Retail redemptions could be contained due to the potential gains offered by Latin American debt as well as the high costs associated with cashing in retail funds.

As long as losses in the region's currency's remain contained, buy-and-hold Japanese investors will likely sit tight, said Tony Volpon, a strategist covering Latin America at Nomura Securities in New York.

"We will need a worsening of the situation to see actual redemptions," Volpon said.

Mexico's peso MXN= weakened 0.9 percent to 11.9980 per dollar. It pared losses which reached 1.78 percent when it touched a session low of 12.1050 per dollar, its weakest level in two weeks.

The region's markets could face further stress as investors tried to gauge the impact of Japan's nuclear crisis, but the rebounds off lows suggested some were betting the impact would be transitory.

Brazil's real BRBY lost 0.3 percent to 1.665 per dollar while Chile's peso CLP=CL gave up 0.52 percent to 483.50 per dollar. Prices for copper, Chile's top export, hit a three-month low.

However, it was still uncertain that the overall impact of Japan's earthquake and tsunami disaster would become a big enough drag on global growth to spur sustained pressure on Latin American currencies.

Strategists said the size of the eventual reconstruction in Japan could become an important support for commodity-linked currencies, like Brazil's real and Chile's peso.

Chile is the world's No. 1 producer of copper and Brazil is among the top producers of agricultural products and iron.

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