Brazil's real falls from near 6-month high ahead of rate decision

The Brazilian real retreated on Wednesday ahead of a central bank policy decision, while the Chilean peso jumped to a fresh one-year high tracking a rise in copper prices. The real fell 1.2% at 5.1810 per dollar after hitting a its highest level since mid-June this week.

Economists expect the bank's rate-setting committee - known as Copom - to maintain the benchmark Selic rate at a record low of 2.0%, as per Reuters poll.

However, there are growing expectations policymakers will signal the start of a tightening cycle from the second half of 2021 as they acknowledge a pick up in inflation.

"We project that the normalisation of the key rate will begin as of mid-2021," Melanie Fischinger, FX and EM analyst at Commerzbank, said in a note.

The Chilean peso jumped 0.9%, benefiting from a rise in copper prices.

That helped overshadow a grim forecast from Chile's central bank, which said the economy would contract by 5.75% to 6.25% in 2020, more than previously predicted.

The Colombian peso gained 0.7% as the currency of the oil-exporting nation got a lift from a rise in crude prices.

The Mexican peso, on the other hand, fell 0.5% with the latest data showing Mexican consumer prices rose less-than-expected in the year through November.

MSCI's index tracking Latin American stocks dropped over 2%, following steepening losses on Wall Street as US economic stimulus remained elusive, while the currencies in the region were weighed down by a firm dollar.

Positive updates on COVID-19 vaccines have lifted appetite for developing world currencies over the past month but market experts are skeptical the rally has much room to run.

"LatAm markets may have seen the bottom this year but how quickly they are going to continue to recover is going to be very susceptible to fiscal and monetary policy, and on top of that, political instability," said Luis Strohmeier, partner and advisor at Octavia Wealth Advisors in Los Angeles.

"The risk versus reward is not very appetizing right now... I'm very cautious on the region."