EMERGING MARKETS-LatAm assets advance as Fed, Brazil rate decisions approach

By Pranav Kashyap and Nikhil Sharma

Sept 16 (Reuters) - Latin American assets firmed on Tuesday, with the local currency index clinching another record milestone as traders prepared for interest rate decisions from the U.S. Federal Reserve and Brazil's central bank this week.

An index tracking the region's currencies .MILA00000CUS jumped 0.42% to a new high, marking its fifth consecutive record-setting session, as it leveraged a weaker dollar =USD, which dropped to an over three-year low.

An index for Latin American equities .MILA00000PUS also rose 0.54%.

Argentine assets attempted a rebound, with Buenos Aires stocks .MERV jumping over 2% after three straight days of declines, while the peso ARS=RASL remained steady. The country's economy likely contracted in August due to higher imports.

President Javier Milei on Monday unveiled a 2026 budget that pledged fiscal discipline but includes increases in healthcare, education and pensions - an effort to regain public confidence ahead of a high-stakes legislative election following a setback in recent provincial elections.

"Our main takeaway from the announcement is the positive shift in tone, with Milei conveying a more pragmatic approach that could help broaden his base of support," said Trevor Yates, senior investment analyst at Global X ETFs.

While his austerity measures, including deep spending cuts, have sharply reduced triple-digit inflation, they have also gutted public services and sparked near-daily protests in the capital.

In the United States, the Federal Reserve's two-day policy meeting is widely expected to conclude with a 25-basis-point cut on Wednesday, following signs of a weaker job market.

Brazil's central bank also begins a two-day policy meeting, with markets expecting it to hold the Selic rate at 15%, near a 20-year high. The restrictive policy, aimed at cooling inflation, has started to weigh on growth, prompting calls for rate cuts later this year.

The real BRL= extended its gains for a fifth consecutive session, rising 0.4%, while Brazilian stocks .BVSP also advanced.

Fresh data showed the jobless rate fell for the fourth consecutive month in July, reaching a record low, reflecting labor market resilience despite tight monetary policy.

Brazil's benchmark interest rate, one of the highest in Latin America, has continued to provide market players with solid returns due to its differential over U.S. borrowing costs, making the real a preferred destination for carry-trade flows.

Brazil's finance minister said interest rate cuts could begin in the coming months. However, analysts noted that even if Brazil resumes its easing cycle, the real would likely remain an attractive option for carry trades.

"The real is doing well and has appreciated strongly and inflation is on the right path. So there's going to be an increasing focus on when the Central Bank of Brazil can move forward," said Alejandro Cuadrado, global head of FX and LatAm Strategy at BBVA.

"The Fed is probably going to open room for that," he added.

The Hungarian forint HUF= has outperformed its regional peers this year, supported by one of the highest interest rates in Europe.

The Colombian peso CLP= rose 0.92% to a one-month high as retail sales surged 17.9% in July on a year-on-year basis, exceeding expectations, while the main stock index .COLCAP fell 0.53%.

The Mexican stock market remained closed for Independence Day, while the peso continued to trade, up 0.4% against the dollar.

Elsewhere, the Zambian kwacha EURZMW= gained 0.6% to a two-week high against the euro after the International Monetary Fund's executive board approved a three-month extension of the country's loan program.

Key Latin American stock indexes and currencies: