EMERGING MARKETS-Latam currencies capitalize on weaker dollar after Moody's credit downgrade

By Nikhil Sharma, Pranav Kashyap and Purvi Agarwal

May 19 (Reuters) - Latin American currencies found firmer footing on Monday, capitalizing on a weaker U.S. dollar, following an unexpected sovereign credit downgrade, while investors sifted through a fresh batch of economic indicators from the region.

The MSCI regional currencies index .MILA00000CUS climbed a solid 0.9%, as the greenback =USD retreated 0.3%.

A parallel index for LatAm equities .MILA00000PUS also advanced 1.1%.

Moody's late on Friday stripped the United States of its pristine "Aaa" rating to "Aa1", causing the dollar to tumble and starting the week on a negative note for the first time in five.

The ratings agency flagged concerns over the nation's ballooning $36 trillion debt and interest payments "that are significantly higher than similarly rated sovereigns".

"The downgrade reflects a growing concern that the U.S. fiscal path is unsustainable," said Mike Goosay, chief investment officer and global head of fixed income at Principal Asset Management.

"If global investors start to question the U.S. role in the global order, that’s when we could see real consequences in the form of sustained upward pressure on borrowing costs and a broader reassessment of risk in dollar assets."

The Sunday approval of U.S. President Donald Trump's sweeping tax-cut bill by a key congressional committee and Treasury Secretary Scott Bessent's comments over the weekend that tariffs could be imposed at threatened levels if trading partners did not negotiate in "good faith" added concerns over the economic outlook of the U.S.

Brazil's real BRL= firmed 0.1% against the dollar, with the benchmark Bovespa stock index .BVSP also ticking up 0.5% to hit another record high.

Economic data out of Brazil offered some encouragement, as a closely watched proxy for GDP delivered an upside surprise, growing 1.3% and beating expectations, after which the finance ministry lifted its GDP forecast for 2025.

The central bank, however, dropped its forward guidance in favor of data dependency amid uncertainty.

Some caution lingered as the world's largest poultry exporter confirmed a bird flu outbreak on Friday and the European Union was the latest to ban Brazilian poultry imports.

Chile's peso CLP= gained 0.7%, drawing support from data revealing the economy expanded by a forecast-beating 2.3% year-on-year in the first quarter.

A recent poll suggested the central bank is poised to keep its benchmark interest rate anchored at 5% at its upcoming June 17 meeting.

In Mexico, the peso MXN= edged up 0.6%, while the local stock index .MXX rose 1%.

Central bank governor Victoria Rodriguez affirmed there was scope for more rate cuts, but added that monetary policy would likely remain in restrictive territory, following a 50-basis-point trim last week.

All eyes are now focused on Mexico's first-quarter GDP figures, due later this week, with preliminary estimates suggesting a 0.7% year-on-year expansion in April.

Argentine stocks .MERV jumped 3% while bonds edged higher, after President Javier Milei's administration received a welcome political boost, when his party's candidates took the lead in Sunday's legislative elections in Buenos Aires.

Elsewhere, Romania's leu EURRON= was on track for its biggest single-day jump since 2012, surging 1.3% following the presidential victory of centrist Bucharest mayor Nicusor Dan on Sunday over his hard-right, eurosceptic rival George Simion.