EMERGING MARKETS-Mexican peso slips ahead of rate decision, Argentine peso leaps further

By Nikhil Sharma

Sept 25 (Reuters) - The Mexican peso weakened on Thursday ahead of a closely watched interest rate decision that is widely expected to deliver a quarter-point cut, while the Argentine peso roared louder on recent U.S. backing.

The spotlight shifted to the upcoming interest rate decision in Mexico later at 3 p.m. ET. While a moderate 25 basis point cut is all but priced in, the attention will center on the remarks about future policy actions.

The meeting comes at a precarious time when Latin America's second-largest economy battles weak economic conditions and attempts to tame stubborn inflation that threatens to breach the upper limit of the central bank's target.

Mexican peso MXN= was set to extend its decline to the third session, down 0.25%. The main equity index .MXX added 0.24%.

"What will be a little bit more interesting will be what message they are sending to us for the next couple of meetings," said Michael Pfister, FX analyst at Commerzbank.

"They (policymakers) probably don't want to sound more dovish to reveal their hands. So they will probably signal further rate cuts, but not change the market expectations towards deeper cuts."

MSCI's index for Latin American currencies .MILA00000CUS extended losses from the day before, down 0.5%. In contrast, the dollar index =USD was up 0.54% as fresh economic data tempered future rate cut expectations.

The greenback has strengthened since an expected Federal Reserve interest rate cut last week. Comments from policymakers this week, including from Fed Chair Jerome Powell, signalling a cautious approach towards the policy action, have further emboldened the U.S. currency.

A gauge of the Latin American equities .MILA00000PUS also extended its decline to fall 0.5% on the day.

The peso ARS=RASL of Argentina continued its blistering run after receiving backing from Washington, climbing 1.2% to take its weekly gain to over 10%, thanks to the U.S. revealing ongoing negotiations for a $20 billion swap line with the country's central bank.

The currency has more than erased the losses suffered after President Javier Milei's legislative setback in early September. The central bank intervened last week.

Buenos Aires stocks .MERV pulled back by falling 3%, snapping its three-day rally.

In Brazil, the real BRL= and the main stock index .BVSP fell 0.2% and 0.4%, respectively. Fresh data showed inflation rising less than expected in the month to mid-September.

The country's inflation will fail to meet the target in early 2028, as per the central bank's latest projections. The bank targets inflation at 3%, with a tolerance band of 1.5 percentage points in either direction.

Brazil's central bank last week kept interest rates at a near two-decade high of 15%, signaling a prolonged pause after a tightening cycle. Elevated interest rates have widened the interest rate differential with its peers, allowing more capital inflows and boosting the currency.

The real has gained over 13% so far this year to be among the top-performing LatAm currencies. The Mexican peso has climbed about 12% year-to-date.

In Colombia, the peso COP= dipped 0.23% and stocks .COLCAP remained steady. Congressional committees gave initial approval to the government's 547 trillion peso ($142 billion) 2026 budget proposal on Wednesday. Chile's peso CLP= lost 0.4% and the Santiago stock index .SPIPSA slipped 0.15%, dragged by LATAM Airlines LTM.SN that fell 3.2% after pricing a $676 million secondary offering.

Key Latin American stock indexes and currencies: