The Mexican peso and Brazilian real were on track to end the week on a positive note as retreating European bond yields eased fears about the euro zone's debt crisis. Benchmark Italian bond yields held below 7 percent on Friday, and Spanish yields also fell, injecting optimism into a market battered this week on lingering worries over the euro zone's debt crisis.
But analysts warned the end-of-the-week rally in Latin American currencies could be short-lived due to the threat of Europe-wide credit downgrades by Standard and Poor's. "The medium-term situation in Europe hasn't been solved," said Pedro Tuesta, interest-rate and foreign exchange analyst with 4Cast Inc. "We still haven't seen a clear a solution for the euro."
Latin American currencies have been driven to multiyear lows in recent months amid concerns Europe's debt crisis could spur another global financial meltdown. A summit of European leaders last week did little to bolster investor confidence, even after countries agreed to draft rules aimed at punishing governments that fail to meet budget targets.
On Friday, Italy's government won a parliamentary confidence vote on its tough austerity package aimed at saving the euro zone's third largest economy and restoring market confidence. Chile's peso bid 0.13 percent firmer at 517.50. Brazil's real was up 0.46 percent to 1.8513 per dollar. Brazilian president Dilma Rousseff said Friday she saw plenty of room to lower interest rates to bolster the economy in the event of a global slowdown.
The country's benchmark interest rate has been cut by 150 basis points since late August to 11 percent on concerns the debt crisis and a global slowdown would drag down Latin America's top economy. While some policymakers in Mexico are also aching to cut interest rates to help the economy, other members of the central bank's board are concerned a weak peso will feed into inflation, according to central bank minutes released Friday.
The Mexican peso firmed 0.29 percent to 13.88 per dollar. 4Cast's Tuesta said he sees the peso ending the year around 13.8 but said that it could easily touch 14 per dollar. The head of Mexico's central bank was quoted on Friday by a local newspaper as saying that 14 per dollar is too weak, given the country's strong fundamentals, adding that he expected the peso appreciate next year.