EMERGING MARKETS-Latam currencies turn higher after Trump pauses tariffs on Mexico

Updates after announcement that tariffs on Mexico paused

By Purvi Agarwal and Lisa Pauline Mattackal

Feb 3 (Reuters) - Latin American currencies reversed early losses and the Mexican peso picked up off a near three-year low on Monday, after U.S. President Donald Trump paused tariffs on Mexico in a surprise reversal that helped stem a selloff in emerging market assets.

Trump paused the tariffs, initially imposed on Feb. 1, for one month after Mexico agreed to reinforce its northern border with 10,000 National Guard members to stem the flow of illegal drugs, he said.

The Mexican peso MXN= reversed course to trade up 1.3%, on pace for its best day in two weeks after earlier touching its lowest level against the dollar since March 2022.

The announcement soothed some nerves following a broad global selloff in risk assets, after Trump on Saturday ordered sweeping tariffs of 25% on Mexican and Canadian imports, and 10% on goods from China, starting Tuesday.

Both Mexico and Canada had announced retaliatory tariffs, while China said it would challenge the order at the World Trade Organization.

The MSCI's index tracking Latam currencies .MILA00000CUS and stocks .MIL00000PUS turned positive, last up 0.6% and 0.2%, respectively.

The turnaround lifted hopes that Trump would use tariffs more as a negotiating tool rather than a permanent move.

"We still think that permanent tariffs on the U.S.'s allies (Canada, Mexico) will not be a thing, concessions are an 'easier' way to deal with Trump's 'problems,'" said Thierry Wizman, global FX & rates Strategist at Macquarie.

The Colombian peso COP=, Brazilian real BRBY and Peruvian sol PEN= all turned higher on the day.

Mexican stock markets were closed for a public holiday, but the U.S.-listed exchange-traded fund tracking Mexican stocks EWW.P rose 2.4% after tariffs were paused.

Still, uncertainty and concerns about a global trade war weighing on growth remained, with the running concern of U.S. tariffs weighing on the outlook for most emerging market assets since Trump's election in November.

"The main transmission channel (of tariffs) to broad EM markets has been elevated uncertainty about trade, immigration, and security policy direction," said Gustavo Medeiros, head of research, Ashmore Group.

Major brokerages, including JPMorgan, warned that the economies of Canada and Mexico could enter a recession if the tariffs were sustained.

The Chilean peso CLP= was down 0.5% despite strong December economic activity figures, as copper prices hit a four-week low.

Argentina's peso ARS= slipped 0.3%, in the first trading session of a new currency scheme. The Merval index .MERV shed 2.2%.

Argentina and Mexico are due to announce monetary policy decisions this week.

The South African rand ZAR= pared some losses but was still down 0.7% versus the dollar, after Trump threatened to cut off funding for the country.

Highlights:

Colombia's Ecopetrol extends contract with Occidental Petroleum in Permian Basin

Key Latin American stock indexes and currencies at 1720 GMT: