Mexican peso drops 1pc as rally in dollar, US bond yields weigh

Latin American currencies joined a broader downtrend in emerging market peers on Wednesday, with Mexico's peso set for its sharpest decline in three weeks, as rising US Treasury yields saw the dollar reign supreme.

The peso weakened 1%, with markets also keeping an eye on manufacturing hit by a deep freeze in Texas.

Factories across parts of northern Mexico on Tuesday reported $2.7 billion in losses from blackouts that extended to a second day on limited natural gas supplies from Texas, where a rare winter freeze has left millions of customers without light or heat.

"The dimension of the effects at the national level can be significant for the industry, as it comes at a time when the (Mexican) economy is just starting to recover," Citigroup strategists said in a note.

US Treasury yields surged as the deep freeze-induced curbs in oil and gas output, and a likely economic recovery led by stimulus and vaccine rollouts spurred bets of a spike in inflation across the globe.

As the dollar hit one-month highs, an index of emerging market currencies slid 0.4%.

"Given the magnitude of the yield backup, we would expect currency markets to be fixated on this space in the near term," said Mazen Issa, senior FX strategist at TD Securities.

"There may be a worry from here that if we continue to see rates backup further - particularly real rates - that equities could roll over."

Colombia's peso fell 1%, even as oil prices rose, while Chile's currency tracked copper prices lower. The Argentine peso returned from an extended weekend to slide further into record low territory.

Brazil markets were closed for a local holiday.

Among stocks, Chile's IPSA index slipped half a percent, on course to break a four-day winning streak and post its worst session in three weeks.