EMERGING MARKETS-LatAm FX caps a banner 2025, buoyed by yield hunt and diversification

By Niket Nishant and Pranav Kashyap

Dec 31 (Reuters) - Latin American currencies firmed in thin year-end trading on Wednesday, putting the finishing touches on a banner 2025 as investors piled into higher-yielding bets amid expectations of a softer dollar and a renewed push for diversification.

MSCI's gauge of regional currencies .MILA00000CUS rose 0.11% and was on track to close out 2025 up nearly 26.6%, its best annual run since at least 2009.

The rally drew strong support from the carry trade this year, with investors borrowing in low-rate currencies and rotating into higher-yielding markets across the region. That tailwind could extend into 2026 if the Federal Reserve begins cutting rates, a shift that typically pressures the U.S. dollar.

Still, the upbeat tone faces potential speed bumps - uncertainty over U.S. trade and a crowded election calendar that could quickly put risk appetite to the test.

"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 56.2% this year, and optimism around Kast spurred a late-year rally. The local peso CLP= gained 9.4% this year.

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. The Colombian peso COP=, meanwhile, rose 14.4%.

A broad global rotation in capital helped power Brazil's Bovespa .BVSP up nearly 34%, its strongest annual gain since 2016. Brazil's real BRL= logged 11.3% gains this year while the Mexican peso MXN= was set to finish the year 13.5% higher.

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:-