Latam currencies fall as Fed action bets reduced

RIO DE JANEIRO: Mexico 's peso and Brazil's real hit their weakest levels in three weeks after a n upward revision to US economic growth caused some investors to cut bets on additional monetary stimulus from the US Federal Reserve.

The Mexican peso lost 0.82 percent against the dollar w hile the Brazilian real weakened 0 .32 p ercent a s ma rket players lo wered expectations for hints of potential stimulus from Fed Chairman Ben Bernanke during a meeting of central bankers in Jackson Hole, Wyoming, on Friday.

Hopes for a third round of quantitative easing, which often translates into dollar inflows to emerging economies, d immed af ter data showed the US economy expanded at a 1.7 percent annual rate in the second quarter, slightly above the government's initial estimate.

"The conditions for the roll-out of QE3 are still somewhat weak and we are seeing some short dollar covering today," said Mike Moran, senior FX strategist at Standard Chartered in New York.

The dollar has started to strengthen globally, Moran noted, and it could gain further "in case Bernanke doesn't make a grand announcement as he did in previous years."

Also weighing on the Brazilian real were expectations that the central bank will allow around $4.5 billion in swaps originally sold to support the currency to expire in the next few days -- effectively mopping up dollar liquidity in the futures market.

Such expectations grew after Brazil's central bank intervened in the market last Tuesday to stop the real from strengthening past the level of 2 per dollar.

Still, the central bank has until Friday to decide whether to roll over the swaps. It could let the contracts expire if signs of additional Fed measures cause the currency to approach the level of 2 per dollar again. Conversely, it could roll them over if Bernanke disappoints and the real weakens too much.

The real has been trading within a narrow band of 2.0-2.1 per dollar for the past two months as the central bank has intervened whenever the currency approaches the edges of that range to either support exporters or avoid inflation pressures.