EMERGING MARKETS-Latam FX at 10-month high as US tariffs on region less than feared

By Johann M Cherian

April 3 (Reuters) - Mexico's peso led gains in major Latin American currencies on Thursday to touch a five-month high as investors were relieved that the region was spared from the worst of U.S. President Donald Trump's reciprocal tariffs.

More broadly, MSCI's Latam currencies index .MILA00000CUS rose 2% against the dollar to hit a 10-month high, while a gauge for regional stocks .MILA00000PUS advanced 2.3% to reach a one-month high.

The U.S. imposed a universal 10% tariff on all imports along with separate duties on individual economies. However, the individual levies were more severe on Asian economies and did not involve Mexico, while exemptions as part of a continent-wide trade deal with the country were also retained.

Mexico's peso MXN= appreciated for the third straight day and was last up 1.6% at 19.8 against the dollar, while local stocks .MXX gained 1.2% to hit a two-month high.

Further providing markets with relief, President Claudia Sheinbaum said that dialogue and cooperation with the United States was ongoing.

The peso and local stocks have witnessed significant volatility over the past two months after Trump imposed tariffs on imports from Mexico and Canada, only to soften his stance later.

Analysts say that his conciliatory stance was because the southern neighbor is a great source for low cost manufacturing, although uncertainty about the tariff outlook persists.

"Trump needs (Canada's and Mexico's) cooperation in building more secure supply chains for U.S. manufacturing within a 'fortress North America'," said Thierry Wizman, Macquarie Group's global foreign exchange and rates strategist.

"Mexico has taken steps to exclude China capital from Mexico, and the rhetorical tone in Mexico has shifted toward an anti-China bias."

SAFE HAVENS

Investors sold the greenback on expectations that a global trade war could also weigh on the U.S. economy. Traders flocked to safe havens such as the Japanese yen and Swiss franc and were also attracted to higher interest rates across Latin American markets.

Despite the day's relief, JPMorgan downgraded its recommendation for emerging currencies to "underweight", citing that U.S. tariffs exceeded its worst-case scenario.

Brokerage Scotiabank also lowered its rating on emerging markets equities to "underweight", while rating agency Fitch cut China's long-term foreign currency recommendation by one notch to "A" from "A+". Under Trump's new policy, China is assigned a combined tariff rate of 54%.

Brazil's real BRL= strengthened 1.1% to touch levels not seen since October, while equities .BVSP climbed 0.3%. The country's assets have outperformed regional peers in the past quarter as markets viewed the economy as less exposed to trade risks.

In focus will be a bill that will lay out retaliatory trade measures in response to the U.S..

Colombia's peso COP= firmed 0.9%, while Chile's peso CLP= appreciated 1.1% and Peru's sol PEN= was up 0.4%.

Colombian stocks .COLCAP lost 1%, weighed down by a 3.1% slide in oil giant Ecopetrol .ECO.CN as crude prices tanked 7%.

Chilean equities .SPIPSA added 0.3%, while those in Peru .SPBLPGPT declined 1.2%.

Argentina's Merval index .MERV shed 3%, bogged down by a 2.6% fall in oil company YPF YPFDm.BA.

An index tracking risk premium for holding Argentina's debt climbed 50 units to 867 basis points, while hard currency bonds maturing in 2038 AR217736501= 2046 AR217736552= and 2041 040114HV5=1M dropped over 1 cent on the dollar.

Elsewhere, Sri Lanka's sovereign dollar bonds XS2966242336=TE extended their declines and were last down more than 3 cents on the dollar, according to Tradeweb data, in the face of 44% U.S. tariffs.

Key Latin American stock indexes and currencies at 1444 GMT: