RIO DE JANEIRO: Latin America's most-traded currencies weakened against the US dollar on Monday as evidence mounted that Europe's debt crisis is causing the world's economies to slow.
Brazil's real, the region's second-most traded currency, weakened 1.18 percent to 1.7635 to the dollar. The Mexican peso, Latin America's most-traded currency, weakened 0.28 percent to 13.5355. Chile's peso weakened 0.50 percent to 500.20.
All of the world's major economies will slow in the coming months, the Organization for Economic Cooperation and Development, a club of the countries with the largest market economies, said on Monday.
Of the main developed and developing countries tracked by the OECD's composite leading indicators, Germany and Brazil showed the fastest rate of slowdown.
"I think it's now pretty clear that Europe is either heading toward or already in a recession," said Win Thin, Latin America economist with Brown Brothers Harriman in New York. "In such an environment we are in a risk-off mode, not just for Latin America but for emerging markets in general."
The news came as German Chancellor Angela Merkel said Europe may be living through its worst moment since World War II as it struggles to prevent the rising risk of default in Greece and Italy.
Such a default could saddle banks with losses, make companies go bankrupt, choke off lending and growth worldwide and lead to the breakup of the euro zone currency union.
New governments in Greece and Italy have failed to ease concern that their debt is spiraling out of control despite efforts to move forward with legislation needed to bring debt in line using spending cuts, tax increases and labor and economic policy changes.
Italy sold 3 billion euros ($4.12 billion) of five-year bonds to yield 6.29 percent, the highest yield since the euro zone currency union was created a little more than a decade ago. That is nearly three percentage points more than Italy paid to sell similar debt at the beginning of the year.
Italy needs to sell hundreds of billions of euros of new bonds to refinance maturing debt in the coming years.
"The feel-good factor we had last week with the new governments in Italy and Greece moving to tackle their debt problems is over," Thin said. Thin, though, sees a potential silver lining in the OECD report's cloud.
Growth in the United States, the world's largest national economy, shows signs of outpacing other regions such as Europe, and China, which, while slowing, will likely continue growing, he said. "This could mean that the risks to emerging markets of the
European slowdown could be limited," he added. Benito Berber of Nomura Securities in New York sees this week as a potentially positive one for Latin American currencies if Greece and Italy move forward with the formation of their new governments.
"As long as it's a quiet week, this could be a good week for risk assets in Latin America." Latin American currencies are "risk assets" because they are less traded, or liquid, than those in US dollars and their price swings or volatility are higher than developed world currencies.
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