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imagesffffRIO DE JANEIRO: Chile peso weakened against the dollar for the first time in four sessions, leading a slide in Latin American currencies, after the country's central bank made a surprise cut in the benchmark interest rate.

The peso weakened 0.28 percent to a bid price of 501.20 to the dollar. The slide trims gains for the week to 1.26 percent.

Friday's declines in Latin American currencies also came after an Italian debt sale failed to attract as much demand as expected, reinforcing expectation that the European debt crisis is far from over and prompting investors to sell so-called risk assets such as emerging market currencies, and buy safe-haven assets such as the dollar.

Policy makers are concerned Europe's debt crisis will lead to a credit crunch as asset values plunge and banks reduce lending. Chile's central bank ignored rising domestic inflation and cut its rate a quarter percentage point to 5 percent.

"We have slowed down because of the external crisis," Chile's Finance Minister Felipe Larrain said. "The risk is not an acceleration of inflation, it is in a slowdown of the global economy balance of risk, how the crisis transmits to Chile, lies there."

A global recession could be especially traumatic for Chile, which gets more than 50 percent of its export earnings from industrial metal copper. Copper for delivery in three months fell 0.5 percent to $7,969.00 a tonne in London on Friday.

Other Latin American economies could also suffer if a slowdown reduces demand for soybeans, oil, iron ore and other commodities. Mexico's peso fell 0.15 percent to 13.5436 to the dollar.

Colombia's peso traded at 1,837.00 to the dollar, little changed from Thursday and checking an eight-session rally that has seen the currency gain more than 5.5 percent.

The Colombian peso is the biggest gainer among 152 currencies tracked by Thomson Reuters against the dollar so far this year.

Brazil's real bucked the regional trend, firming 0.16 percent to 1.7810 to the dollar, after rising more than 0.6 percent in early trading.

"Brazil has been gaining in recent days on the country's strong fundamentals and strong capital flows to the country," said Guilherme Monaco, a trader at Hencorp Commcor, a Sao Paulo brokerage. "The Italian sale and lingering European crisis has taken a bit of the shine off that today."

Copyright Reuters, 2012

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