EMERGING MARKETS-Brazil's real drives LatAm FX to record highs ahead of central bank meetings

By Pranav Kashyap and Twesha Dikshit

Sept 15 (Reuters) - An index tracking Latin American currencies crawled to a new record high on Monday, with traders focused on this week's U.S. Federal Reserve rate decision, while Brazil's real led gains in the region and climbed to its highest level in over a year.

The real BRL= rose 0.5% to its highest since June 2024, eyeing a fourth consecutive advance. The central bank begins a two-day meeting on Tuesday and is expected to hold rates near two-decade highs on Wednesday.

But keeping borrowing costs at 15% - among Latin America's steepest - to tame sticky inflation is straining growth. July activity fell more than expected, the third monthly drop in a row.

Stocks in Sao Paulo gained 0.4%.

The Colombian peso COP= also hovered close to its highest in over a year, while stocks in Bogota .COLCAP edged 0.2% higher.

Colombia last week slashed its budget proposal for next year by 10 trillion pesos ($2.55 billion).

Emerging market assets were buoyed by growing confidence that the Federal Reserve will cut interest rates this week — and signal more to come. Latin American currencies surged, with the region's benchmark index .MILA00000CUS climbing 0.7% to a record high, while equities hit their highest since May 2024.

Markets are pricing in a quarter-point cut that would lower the Fed funds rate to 4.0–4.25%. All eyes will be on the Fed's updated "dot plot" on projected policy moves and Chair Jerome Powell's guidance, as investors hunt for clues on how deep and fast the central bank might ease from here.

"The focus in this meeting is going to be less on the decision and more the path forward. The dot plot will be the market's anchor," said Daniela Sabin Hathorn, senior market analyst at capital.com.

"Given how much dovishness is already priced, any median path that signals fewer cuts or a slower easing cycle in 2026 would read as hawkish."

Bucking the trend in LatAm, however, was the Mexican peso MXN=, which was only marginally higher on the day. This week, Mexican officials were set to speak with representatives from China about planned tariffs on goods from the Asian country.

Peruvian equities .MXNUAMPESCPGPE inched 0.3% higher after data showed the economy expanded 3.41% in July, exceeding expectations.

Turkey's markets jumped, with the lira TRY= snapping a six-day losing streak and Istanbul stocks .XU100 soaring over 5% to a two-week high, as political uncertainty eased — at least for now.

Bond yields across the curve — two, five, and ten-year — dropped to their lowest levels in a fortnight, reflecting renewed investor confidence.

Gains for bonds came after a court postponed a ruling on whether to remove the opposition leader over alleged irregularities — the prospect of which triggered heavy selling last week. The adjournment to October 24 offered traders a breather, tempering fears of a disruptive shake-up in the Republican People's Party and its chairman, Ozgur Ozel.

Elsewhere, Ukraine's international dollar bonds rose over one cent. A Reuters report said one of Russia's largest oil refineries halted a key processing unit following a Ukrainian drone attack over the weekend as Kyiv intensified strikes on Russia's energy infrastructure.

Key Latin American stock indexes and currencies: