Latin American currencies surged on Thursday with Chile's peso hitting a two-week high as receding inflation fears saw the dollar and US Treasury yields hit one-week lows.

Risk appetite got a boost after tepid underlying consumer prices data from the United States on Wednesday eased concerns about a likely surge in inflation from large stimulus packages, which had hammered markets in recent days.

Brazil's real, one of the worst performing currencies year-to-date, rose 1% after data showed inflation in the country came in above 5% in February for the first time in four years - higher than analysts' estimates - strengthening the case for an interest rate hike next week.

But the bank is more likely to take a cautious approach so as not to further jeopardise economic recovery, said EM FX strategists at Commerzbank.

"This makes it highly likely that it will disappoint market expectations and that the real will lack deliverance from this side. A rate hiking cycle is likely to stabilise the real, however, it will not help it to rally in view of a continuously negative real interest rate."

Brazil's central bank said it would sell up to $1 billion in currency swaps on Thursday, extending its recent intervention in the foreign exchange market to support the depreciating currency.

Meanwhile, the Pan American Health Organization warned that COVID-19 infections in Latin America are still rising at a worrying rate, particularly in Brazil where a resurgence has caused record daily deaths.

Mexico's peso extended gains to a third straight session, while Colombia's peso hit a near one-month high as oil prices climbed.

Fears of a ratings downgrade for Colombia deepened after Moody's said Colombia's 2021 fiscal deficit estimate is larger than the rating agency expected. Moody's plans to review the country's rating late this year or early next.

The world's top copper producer Chile's peso jumped 1% as prices of the red metal approached 10-year highs.

While surging commodity prices have brightened the outlook for commodity-linked currencies, those in emerging markets have struggled to keep up with developed peers.

Among stocks, Brazil's Bovespa rose 1% to extend gains to a third straight session, while Chile's IPSA notched a new 14-month high.