EMERGING MARKETS-Colombian, Mexican peso lead Latam FX declines on tariff fears

Updates to mid-session trading

By Purvi Agarwal, Lisa Pauline Mattackal and Johann M Cherian

Jan 27 (Reuters) - The currencies of Colombia and Mexico depreciated on Monday, leading declines among Latin American peers after a trade spat between the U.S. and Colombia re-ignited fears about the impacts of U.S. President Donald Trump's proposed tariffs on the region.

The U.S. and Colombia pulled back from the brink of a trade war on Sunday after the White House said Colombia had agreed to accept military aircraft carrying deported migrants.

That led to the U.S. holding off on a Trump directive to impose tariffs and sanctions, which included a 25% tariff on imports that could go up to 50% in a week, among others, on the third-largest U.S. trading partner in Latin America.

Colombia's peso COP= trimmed early declines and was last down 0.7%, on track for its biggest daily drop in over a week. The currency had declined nearly 2% earlier in the session.

The Mexican peso MXN= weakened 2.3% after logging its biggest weekly rise in 2025 on Friday. The currency is among the most sensitive to tariff headlines as 80% of the country's exports go to its northern neighbor.

Investors also sold Colombian CO10YT=RR and Mexican MX10YT=RR 10-year bonds.

The spat highlights how uncertainty over tariffs has clouded the outlook for EMs, compounding pressures from economic uncertainty and the prospect of higher-for-longer U.S. interest rates.

"The episode highlights how the Trump administration will intertwine trade policy with national security policy and so markets will face greater volatility and surprises... the biggest test of this strategy will be with China," said Win Thin, Brown Brothers Harriman's global head of market strategy.

Economies, including China and Mexico's, are on edge after Trump last week earmarked Feb. 1 for additional tariffs on the country's top trading partners.

BofA Global Research analysts said U.S. tariffs could force Mexico's central bank to keep rates on hold, "as the peso is likely to weaken significantly in that scenario."

MSCI's index tracking regional currencies .MILA00000CUS was down 0.9%, while the stocks' measure .MILA00000PUS was off 0.2%, set to snap a six-session winning streak.

This week, investors will also closely watch a rate decision from the Fed, which is expected to keep rates on hold.

Rate decisions are also due from Brazil, Colombia and Chile through the week.

Inflation expectations in Brazil for this year rose for the 15th straight week, a survey of private economists showed, a trend closely watched by the central bank ahead of an expected rate hike.

The Argentine peso ARS= dipped 0.3% and the Merval stock index .MERV lost 5%.

Ratings agency Moody's on Friday raised Argentina's long-term foreign currency sovereign credit rating, citing policy changes that have helped address economic and fiscal challenges.

Colombia's main index .COLCAP gained 1.27% and U.S.-listed Colombia ETF GXG.N gave up early declines and was last up 0.8%.

Mexican stocks .MXX added 0.9%, while Brazil's Bovespa .BVSP gained 1.6%.