EMERGING MARKETS-LatAm currencies poised to hold firm after strong 2025

By Niket Nishant

Dec 31 (Reuters) - Latin American currencies inched higher in thin year-end trading on Wednesday after a standout year driven by expectations of a weaker dollar and a push for portfolio diversification.

The MSCI index tracking regional currencies .MILA00000CUS ticked up 0.14%, and was on track to end 2025 with gains of nearly 26.5%, its strongest performance since at least 2009.

The asset class was a major beneficiary of the carry trade, where investors borrow in currencies with low rates to invest in those offering higher returns, in 2025.

Its appeal could endure next year, with investors betting that the Federal Reserve could lower rates, which is expected to weigh on the U.S. dollar.

However, uncertainty surrounding trade relations with the U.S. and the busy election calendar could reverse the bullish mood.

"LatAm economic and market outcomes for 2026 hinge on the lead-up to, and results of, elections in the region, with Brazil's October 2026 vote serving as the most important," economists at Scotiabank wrote in a note.

STOCKS LOG THEIR STRONGEST YEAR SINCE 2009

While most regional equity markets were shut on Wednesday, the MSCI index tracking regional stocks .MILA00000PUS climbed 46.4% in 2025, logging its best annual performance since 2009.

The best regional performers included equities in Chile .SPIPSA, which earlier this month elected Jose Antonio Kast as its president.

The stock benchmark gained 56% this year, and optimism around Kast spurred a late-year rally.

In Colombia, anticipation in the market of an investor-friendly government next year outweighed concerns over a dispute with Washington, and helped the stock benchmark .COLCAP climb nearly 50% this year.

Regional heavyweights Brazil and Mexico also advanced.

A global reallocation of capital boosted Brazil's Bovespa .BVSP by nearly 34%, its best performance since 2016.

Argentina's Merval .MERV index gained 20.4%, propelled by a surprise mid-term victory for President Javier Milei's party and a financial lifeline from the United States.

RISKS EXPECTED TO PERSIST IN 2026

Despite the stellar year, investors face a high level of uncertainty in 2026. Trade relations with the United States have not been settled, and sustaining investor interest will depend on fiscal discipline and stable policy.

Regional assets will also have to contend with competition from other emerging markets as investors may gravitate toward equities in South Korea, Taiwan and China that are more likely to be beneficiaries of the AI boom.

Central bank policy paths will be under scrutiny, with a range of domestic factors at the forefront.

In Colombia, some analysts are recalibrating monetary policy expectations after the government said it would raise the minimum wage by nearly 23% in 2026, a step that is expected to increase inflation.

Geopolitical strain adds another layer of uncertainty, as tensions between the United States and Venezuela have escalated. Any confrontation could weigh on regional markets and spill over into oil prices.

Key Latin American stock indexes and currencies: