Markets fell on Thursday after a budget plan proposed by a Republican leader failed to win support from his own party, raising the chances that austerity measures kick in next year. US lawmakers are struggling to come up with a deal to avert $600 billion worth of tax increases and spending cuts, a combination that could push the world's largest economy back into recession next year.
"The risk is rising that (talks) are going to drag into next year," said Delia Paredes, an analyst at Mexico's Banorte-IXE. A US economic downturn could hit Mexico the hardest among Latin American countries, since it sends nearly 80 percent of its exports to its northern neighbour. Bets on a deal by US lawmakers before the end of the year had spurred gains in riskier assets, such as Latin American currencies. Mexico's peso hit a two-month high last week.
Brazil's central bank intervened twice earlier in the day, selling up to $4 billion in two auctions with repurchase agreements. The auctions were designed to increase the supply of foreign exchange before year-end, but traders and analysts said they aim at curbing excessive losses in the Brazilian real. The central bank said after the market close that it will sell up to $2 billion on the spot market on December 26 with a repurchase agreement.
"After all the central bank has done, I think it wants the foreign exchange rate below 2.1 per US dollar. It can even strengthen past 2.05 per dollar," said Reginaldo Siaca, manager at Advanced brokerage in Sao Paulo. Chile's peso shed 0.67 percent to 478 per dollar to close at its weakest in two weeks.