Currencies surge as aggressive Fed bets ease on softer U.S. inflation data



By Susan Mathew

Aug 10 (Reuters) - South Africa's rand jumped 2% while currencies of Brazil and Mexico rallied more than 1% on Wednesday after word that U.S. inflation rose less that expected in July, easing bets that the Federal Reserve will need to maintain its current pace of hikes.

U.S. Treasury yields slumped and the dollar =USD slid more than 1% after U.S. data showed underlying inflation remained unchanged while the headline figure rose to 8.5% from a year ago, less than the 8.7% rise that was expected.

This saw traders slash bets that the Fed Reserve will deliver a third straight, 75-basis-point interest rate increase in September.

MSCI's index of emerging market currencies .MIEM00000CUS rose to over one-month highs, up 0.5%. It was trading flat before the data.

Stocks .MSCIEF , which were down about 0.9% before the data, cut losses and were last seen trading down 0.4%.

"The (U.S) tightening cycle is unlikely to end soon, but the Fed may opt for a smaller rate hike if there is more evidence that inflationary pressures have eased," said Piotr Matys, senior FX analyst with InTouch Capital in London.

"The selling pressure on the EM currencies should ease accordingly. When markets have sufficient conviction that rates will not rise further in the U.S., we may witness a proper wave of capital inflows into EM."

The Chinese yuan CNY= hit session highs after the data, up 0.5%, while Brazil's real BRBY BRL= and Mexico's peso MXN= touched near two-month highs. The South African rand ZAR= was on course for its best session in three months.

Investors seemed to look past data that showed retail sales in Brazil fell more than expected in June.

The U.S. data lifted commodity prices. Crude exporter Colombia's peso COP= rose 1.5%, while copper producer Chile saw its peso climb 1.7%, extending gains to a third straight session.

Despite a surge in the euro, central and eastern European currencies firmed, with the Czech crown EURCZK= hitting a one-month highs.

As Wall Street rallied, emerging market stocks got a lift with a gauge of eastern European stocks .MIME00000PUS , which was more or less flat ahead of the data, rising 2%.

In Argentina, the government on Tuesday performed a voluntary debt swap for some 2 trillion pesos ($15 billion) for bonds maturing over the next 90 days, relieving pressure on the country's struggling public finances.

But Citigroup strategists remain skeptical as fiscal dynamics are highly challenging.

Meanwhile, traders told Reuters that Argentina's central bank is likely to raise its benchmark interest rate by 600 basis points this week to tackle inflation.

Key Latin American stock indexes and currencies at 1402 GMT: Stock indexes

Latest

Daily %

change MSCI Emerging Markets

998.28

-0.34 .MSCIEF

MSCI LatAm

2263.78

2.51 .MILA00000PUS

Brazil Bovespa

110217.04

1.44 .BVSP

Mexico IPC

47787.84

1.16 .MXX

Chile IPSA

5270.14

0.65 .SPIPSA

Argentina MerVal

-

- .MERV

Colombia COLCAP

1333.41

0.86 .COLCAP

Currencies

Latest

Daily %

change Brazil real

5.0526

1.52 BRBY

Mexico peso

19.9740

1.22 MXN=D2

Chile peso

888.2

1.66 CLP=CL

Colombia peso COP=

4283.05

1.43 Peru sol

3.9306

-0.33 PEN=PE

Argentina peso

134.0400

-0.14 (interbank) ARS=RASL


Reporting by Susan Mathew in Bengaluru; editing by Mark Heinrich

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