EMERGING MARKETS-Latam assets cautious amid Middle East jitters; Chile's rate decision looms

By Nikhil Sharma and Pranav Kashyap

June 17 (Reuters) - Latin American assets traded lower on Tuesday, as caution prevailed with the Israel-Iran conflict entering its fifth day, while the focus was also on a handful of interest rate decisions in the region.

The MSCI's index for Latin American currencies .MILA00000CUS was down 0.3%, just off its fresh record high reached earlier in the session.

A parallel index for the latam equities .MILA00000PUS was trading 0.9% lower, taking cues from caution in global equities.

Tensions in the Middle East took a dramatic turn when U.S. President Donald Trump said that American patience with Iran was wearing thin, though he also noted that there was no immediate intention to "take out" its leader. He further suggested the possibility of diplomatic outreach amid the ongoing conflict.

Israel's shekel ILS= reversed course, falling 0.5% against the dollar after an eye-watering 3.5% surge the previous day, its sharpest single-day gain in nearly 50 years.

Meanwhile, investors chasing yield continued to pour into developing markets. EPFR data showed local-currency EM bond funds bagged a record eighth straight week of inflows — a clear vote of confidence in the hunt for returns beyond Wall Street.

"People in foreign countries that had been investing in the U.S. assets are now bringing those assets home. So that also tends to be negative for the dollar," said Jon Harrison, managing director of EM Macro Strategy at TS Lombard.

Brazil's real BRL= was flat amid choppy trading, but it's still up more than 11% year-to-date, turbocharged by sky-high local interest rates—currently parked at 14.75%, a level not seen in nearly two decades.

All eyes are on Brazil's central bank ahead of its policy meeting on Wednesday, with forecasts pointing to rates remaining unchanged.

The local equity index .BVSP slipped 0.5%.

Mexico's peso MXN= fell 0.4% - on course to log its biggest single-day drop in three weeks, while its local benchmark index .MXX lost 0.9%.

Chilean investors closely monitored the central bank's upcoming rate decision. The consensus was another hold at 5% for the fourth consecutive meeting, as policymakers tread carefully in the face of persistent inflation. Recent data showed the world's largest copper producer outperforming economic forecasts.

The Chilean peso CLP= drifted 1% lower - setting it on course for its worst single-day drop in over one month, while Santiago's stock market .SPIPSA dropped 0.8%.

Elsewhere, Colombia's peso COP= firmed by 0.2%, and the main stock index .COLCAP was flat.

However, the country remains plagued with political uncertainty after Senator Miguel Uribe, a potential presidential candidate, was shot in the head earlier this month during a campaign event.

Uribe is in "extremely critical" condition after undergoing emergency surgery on Monday.

Argentina's stocks .MERV resumed trading after a holiday, falling 2.4% on the day, while Hungary's forint EURHUF= rose 0.4% and Budapest stocks .BUX rose 1.3%, approaching record highs. The catalyst was the parliament's passage of Prime Minister Viktor Orban's 2026 election-year budget, featuring hefty tax breaks for families.

Key Latin American stock indexes and currencies: