EMERGING MARKETS-Banxico's easing weighs on peso as Argentine assets cool after a strong run

By Nikhil Sharma and Pranav Kashyap

Sept 25 (Reuters) - The Mexican peso weakened on Thursday after a widely expected interest rate cut, while Argentine assets took a breather after a blistering run.

Mexico's central bank cut rates by 25 basis points to 7.5% in a widely expected move.

"The resumption of monetary easing by the U.S. Fed and the appreciation of the peso all support the continuation of Banxico's easing cycle. We expect two more 25bp cuts by year-end," said Liam Peach, senior emerging markets economist at Capital Economics.

Mexican peso MXN= was set to extend its decline to a third session, down 0.7% at a two-week low, while the main equity index .MXX added 0.25%.

Mexico's central bank is tiptoeing through a minefield of inflation and weak growth, cutting rates for the eleventh time since kicking off its easing cycle in early 2024. But Banxico's balancing act is getting trickier — core inflation remains stubborn and headline prices are inching toward the top of its target band.

With the economy still limping, the bank is sticking to a data-driven playbook, trying to stoke demand without letting price pressures boil over.

MSCI's index for Latin American currencies .MILA00000CUS extended losses from the day before, down 0.9%. In contrast, the dollar index =USD was up 0.7% as fresh U.S. 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, signaling 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 1.3% on the day.

Argentina's peso ARS=RASL gave up the day's gains to trade flat, but was still up over 9% this week after Washington threw it a lifeline — revealing talks for a $20 billion swap line with the country's central bank. The rally has wiped out losses from President Javier Milei's recent legislative stumble, injecting fresh optimism into markets.

Buenos Aires stocks also cooled, snapping a three-day winning streak, and slid 4%.

Meanwhile, the government reinstated grain export taxes just days after suspending them, having hit its $7 billion sales cap in a bid to shore up dollar reserves and stabilize the currency.

In Brazil, the real BRL= fell to a two-week low, while the main stock index .BVSP shed 0.7%. 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.

In Colombia, the peso COP= dipped 0.5% 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 0.9% and the Santiago stock index .SPIPSA dropped 0.8%.

Key Latin American stock indexes and currencies: