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EMERGING MARKETS-Latam currencies fall on growth concerns
May 5, 2011 / 9:31 PM / 6 years ago

EMERGING MARKETS-Latam currencies fall on growth concerns

* Weaker world economic outlook cuts risk appetite

* Price for regions metals, oil, grains plunge

* Brazil real slips the most since Oct. 19

* Chile peso weakens 0.39 percent.

By Jeb Blount

RIO DE JANEIRO, May 5 (Reuters) - Latin American currencies weakened for a second day on Thursday, led by the Brazilian real, as commodity prices plunged and data suggested the global economic recovery is faltering.

The real BRBY shed 1.21 percent, its biggest one-day decline in more than six months, to close at 1.613 to the dollar, its weakest end-of-session level since March 31.

Iron-ore, oil, sugar, soybeans, beef and coffee -- Brazil’s principal commodities exports -- all fell.

Chile's peso CLP= weakened 0.6 percent to 468.10, its weakest close since April 20. Copper, the country's biggest export, fell to its lowest in five months.

The Mexican currency MXN= weakened 0.67 percent to 11.7246 to the dollar after earlier reaching 11.74, the lowest in about two weeks. Oil, its biggest export earner, fell below $100 a barrel in the United States for the first time since March 17.

“There are genuine doubts about the global recovery and a feeling that it is losing some traction,” said Michael Derks, chief currency strategist with FXPro, a London-based retail currency broker. “That has created a pretty strong impulse to risk aversion which is weighing on commodities prices and high-beta currencies such as Brazil.”

Signs the U.S. service sector is slowing, German factory orders are down, and that China is seeking to limit inflation have led some to believe the cycle of high commodities prices may be ending.

Emerging market currencies in general frequently undergo large swings against the dollar. Such risk forces governments and companies in these countries to pay higher returns for the right to borrow money, increasing their appeal to global investors.

Interest rates have remained near zero in the United States since late in 2008, allowing investors to borrow cheaply in dollars and pour the proceeds into emerging markets where rates are higher, a bet known as the carry trade.

A global economic slowdown could make the carry trade riskier, especially with so many investors betting the region’s currencies will rise, he said.

Returns on the popular carry trade in Brazil have slipped to about 1 percent from nearly 7 percent in April after the government raised taxes on some dollar loans, according to BNY Mellon.

“You have very long positions in the carry trade in the commodities currencies in Latin America and even small movements in conditions or commodities prices can create large movements in the currencies,” Derks said. “It’s like when there’s a party and everyone tries to leave the party at once.”

In addition to copper’s declines, light crude fell 8.9 percent on the New York Mercantile Exchange CLc1, hitting $99.61 a barrel, its lowest since March 17. Soybeans SK1 fell 2.26 percent. Coffee KCN1 fell 5.5 percent. Iron-ore for July settlement slipped 1.45 percent and sugar fell 2.3 percent.

Mexico, Brazil and Colombia are large oil producers. Brazil is the world’s second-largest soybean producer and the largest producer of coffee and sugar. Colombia is a major coffee producer.

Yield spreads between emerging market bonds and U.S. Treasuries, a key gauge of risk aversion, rose to 192 basis points, or 1.95 percentage points more than comparable U.S. Treasuries, according to JPMorgan Chase & Co.’s EMBI+ index 11EMJ.

Editing by Stuart Grudgings and Chizu Nomiyama

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