Latam currencies weaken as dollar firms, El Salvador's bitcoin adoption hits snags

Latin American currencies weakened on Tuesday as rising US Treasury yields sent the dollar rallying, while El Salvador became the first country in the world to adopt bitcoin as legal tender.

The adoption of the cryptocurrency, which will serve alongside the US dollar in the country, suffered teething problems when the government had to unplug a digital wallet to cope with demand.

President Nayib Bukele said El Salvador holds 400 bitcoins. He expects the move to be beneficial for the country and for remittances, but polls show Salvadorans remain somewhat sceptical considering its volatility.

Analysts fear the move may fuel money laundering and financial instability. It has already muddied the outlook for more than $1 billion in financing that El Salvador is seeking from the International Monetary Fund.

This comes as a mandate over the weekend allowed for the president to stand for reelection.

"Market participants are likely to read this as another move consolidating power around the executive, and one which is likely to generate even more delays with the ongoing IMF negotiations," said strategists at Citi in a note.

Most Latam FX slips as dollar attempts comeback

"We were skeptical on the recent rally in El Salvador bonds... Uncertainty created by (reelection) news will weigh negatively on bonds."

As the dollar made up for recent losses, Chile's peso fell 0.5% to lead losses across the region as prices of its biggest export, copper, fell.

With Saudi Arabia's sharp cuts to crude oil contract prices for Asia weighing on oil prices, exporter Colombia's peso also fell 0.4%.

Mexico's peso broke a seven-session winning streak, down 0.1% ahead of its 2022 budget proposal expected to be presented on Wednesday.

"In the absence of a comprehensive fiscal reform proposal, expenditure cuts and use of assets will likely be needed again," said Citi strategists.

"As has been the case, we anticipate a commitment to conservative fiscal targets and focus on (President Andres Manuel Lopez Obrador's) spending priorities."

Brazil markets were closed for a holiday.

Stocks in the region fell, in line with world stocks, as growth worries spooked markets.

A broader index of emerging market stocks found some support from a surprise rise in China August exports.