Latin American markets perked up Thursday, with stocks and currencies both gaining ground as the US dollar softened. MSCI's Latin America index rose 1.8%, while the region's currencies strengthened by 0.5% against the greenback, according to the index provider's data.
The move was broad-based: Mexico's market rose alongside the peso, and other big economies in the region also saw equities and currencies firm. Traders were watching for Banco de México (Banxico), the country's central bank, to keep its benchmark interest rate at 6.50% at its upcoming decision.
Why a softer dollar matters for emerging markets
A weaker US dollar often gives emerging markets room to rally. That's because many countries and companies in Latin America borrow in dollars, so a cheaper dollar lowers the cost of servicing that debt. It also makes local assets — stocks and bonds — look more attractive to global investors who are comparing returns across currencies.
This week's move also fit a broader "risk-on" mood, with investors leaning back into stocks after recent jitters. The US dollar had edged higher earlier in the week as traders braced for a deluge of economic data and Federal Reserve remarks, but Thursday's easing gave emerging markets a tailwind.
When local interest rates stay high — like Mexico's 6.50% — and the dollar is calm, international money is more willing to take currency risk in search of yield. That can amplify both currency and stock gains, as we saw Thursday.
What it means for investors
For dollar-based investors, returns from Latin American stocks come in two layers: how local shares perform and what the local currencies do versus the dollar. Thursday's 1.8% bounce in the MSCI Latin America index came with a 0.5% currency tailwind, meaning part of the gain was simply from the peso, real and other currencies strengthening.
When the US dollar softens and policy rates stay high — like Banxico holding at 6.50% — investors can get paid to hold those currencies, and any extra currency strength then adds to equity gains once they're translated back into dollars. The flip side matters just as much: a stronger dollar can shrink or wipe out dollar returns even if local stock indexes barely move.
This dynamic is especially relevant now, as investors weigh the outlook for US interest rates. If the Fed cuts rates later this year, the dollar could weaken further, potentially giving emerging markets another boost. But if inflation stays sticky and the Fed holds steady, the dollar could strengthen again, reversing Thursday's gains.
Broader context: Latin America's mixed picture
Thursday's rally came after a period of volatility for Latin American markets. Earlier this week, Brazil's inflation edged up to 4.80%, posing a challenge for the central bank's rate-cut path. Higher inflation in Brazil could keep its interest rates elevated, which might support the real but also slow economic growth.
Mexico, meanwhile, has kept its benchmark rate at 6.50% since November 2021, as the central bank tries to bring inflation down from multi-year highs. The peso has been one of the best-performing emerging-market currencies this year, partly because of those high rates and partly because of nearshoring flows — companies moving production closer to the US.
Other commodities also benefited from the weaker dollar on Thursday. Copper bounced 1.1% as a softer dollar lured bargain hunters after a two-day slide. Copper is a key export for Chile and Peru, so a rally in the red metal can boost their stock markets and currencies.
What to watch next
Investors will be watching Banxico's rate decision closely. If the central bank holds at 6.50% as expected, that could support the peso and Mexican stocks further. But if it surprises with a cut, the peso could weaken, potentially reversing some of Thursday's gains.
The broader direction of the US dollar will also be key. If the dollar continues to ease, Latin American markets could extend their rally. But if it strengthens again, the region's stocks and currencies could come under pressure.
For now, Thursday's bounce is a reminder that when the dollar softens and local rates stay high, emerging markets can offer attractive returns — but the risks of a sudden dollar reversal are always present.
