November 24, 2011 / 9:37 PM / 8 years ago

EMERGING MARKETS-Brazil real sinks, pesos edge back from lows

* Brazil’s real slumps back near over 2-year low

* Mexico’s peso edges back from 2-1/2 year low

* Brazil real loses 1.7 pct, Mexico peso adds 0.13 pct

By Asher Levine and Michael O’Boyle

BRASILIA/MEXICO CITY, Nov 24 (Reuters) - Brazil’s real sank on Thursday after rising German business sentiment failed to stem fears that the euro-zone debt crisis is deepening and could engulf even Europe’s biggest economy.

Trading volume plunged with U.S. investors absent due to the Thanksgiving holiday, exacerbating volatility.

German business sentiment rose unexpectedly in November for the first time in nearly half a year, helping Mexico’s peso snap back from a 2-1/2 year low.

But German bond prices kept falling, hitting a nearly one-month low following a botched auction on Wednesday that raised concern the crisis may be spreading to Europe’s economic powerhouse.

“Germany has been the safe-haven position to hold, and now that has been called under question and it is really alarming investors,” said Edwin Gutierrez, who helps manage $7 billion of emerging market debt at Aberdeen Asset Management in London.

“The continued flight to dollars could keep gathering steam,” he added.

Brazil’s real has fallen 10 percent against the dollar in November. Mexico’s peso is off over 8 percent.

As the prospect for European growth worsens, risk appetite decreases, and investors sell relatively riskier assets, such as those in Latin America, said Neil Shearing, senior emerging markets economist at Capital Economics in London.

The Brazilian real erased early gains to close down 1.7 percent at 1.8911 per dollar, a two-month low. The slump left the currency within striking distance of a more than two-year low.

RATE CUT SEEN IN BRAZIL

All of 32 analysts polled by Reuters expect Brazil’s central bank to cut its benchmark interest rate by 50 basis points to 11 percent next week.

“Today’s fall (in the real) may also be driven by an increase in bets on rate cuts in Brazil,” Shearing added.

Lower benchmark interest rates can sap some demand for emerging market assets. Brazilian policy-makers expect the local economy to be hit by the deepening crisis in Europe and slower growth in China, Brazil’s top trading partner.

Mexico’s peso firmed sharply overnight, helped by the German sentiment data, but then followed a reversal in the euro and gave up almost all of its gains.

“The market is still really uncertain about Europe, and everyone goes against the peso when risk aversion increases,” said Alfredo Puig, a trader at brokerage Vector in Monterrey, Mexico. “It looks like the peso will keep depreciating.”

The peso surged as much as 1.3 percent to 14.0415 during European trading hours, but fell back to trade at 14.2121 per dollar, only 0.13 percent firmer.

Inflation in early November in Mexico rose more than expected, pushing up yields on Mexican interest-rate swaps as investors trimmed bets on an interest-rate cut in the coming months.

Mexico’s central bank is unanimously seen holding its benchmark rate steady at 4.5 percent on Dec. 2, according to a Reuters poll.

Investors have called off bets on a cut next week after the peso’s recent slump, which could inflame inflation through higher import prices.

Chile’s peso bid 0.34 percent stronger at 522.90 per dollar, bouncing back from its weakest in nearly seven weeks as prices for copper, the country’s main export, edged back from a one-month low.

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