Latam FX drops on rising U.S. interest rate risk

Dec 14 (Reuters) - Most Latin America currencies dropped on Tuesday as hotter-than-expected U.S. producer price readings fueled expectations of an early Federal Reserve rate hike, while Chile's peso slipped ahead of a widely expected interest rate hike.

The Chilean central bank seen hiking by a bumper 125 basis points (bps) to 4.0% - their highest in seven years, to curb a spike in inflation brought about by surging post-COVID-19 economic growth.

The peso eased 0.3%, tracking declines in copper prices as a COVID-19 outbreak caused disruptions in major importer China. Santiago stocks (.SPIPSA) hit six-week lows, slumping 2.8%.

The presidential election race is also set to increase political uncertainty in Chile, ahead of a polarized runoff on Sunday, with ultra-conservative Jose Antonio Kast narrowing the gap with leftist former student leader Gabriel Boric. read more

Besides inflation, continuing peso depreciation, the uncertain political environment and deteriorating fiscal dynamics call for a conservative monetary policy in Chile, Goldman Sachs analysts wrote in a note. They see the rate ending the year at 4.0% and at 5.75% by 2022 end.

Other Latam currencies also fell as the dollar firmed after data showed the U.S. producer price index (PPI) shot up 9.6% in November year-on-year, clocking its largest gain since November 2010.

This strengthened bets for an earlier Fed rate hike. The Fed's monetary policy decision in due on Wednesday. read more

Colombia's peso sank 2.9% - the worst single day fall since the peak of pandemic panic in March 2020. Weak oil prices and two explosions at the airport in the Colombian border city of Cucuta shook investor sentiment.

"Investors have been quite cautious on the Colombian peso because of the uncertainty around elections next year and in general we are seeing a rotation out of Latam essentially because of the inflation play," said Christian Lawrence, senior strategist at Rabobank.

Interest rate hikes from Mexico and Colombia are also anticipated this week, with rising inflation acting as a common theme across emerging markets this year.

Mexico's peso slipped 0.8%, set for its worst session in more than two weeks.

Brazil's real extended losses for a straight fourth session. Brazil's services activity fell in October for the second month in a row, providing further signs of weakness in Latin America's largest economy.

Minutes from the Brazilian central bank's last meeting showed President Roberto Campos reiterating his plan to proceed with aggressive monetary tightening. read more

In Argentina, consumer prices rose 2.5% in November, data showed, slower than a month earlier and well below analyst forecasts of a 3.1% rise. But the annual rate remained at an eye-wateringly high level of 51.2%. read more

Latin American stock indexes and currencies:

Reporting by Ambar Warrick and Shashank Nayar; Editing by Mark Heinrich and Grant McCool

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