(Bloomberg) -- Emerging market currencies rose Tuesday, bolstered by expectations that the US Federal Reserve is done hiking interest rates, but most Latin American currencies slipped on concern that the recent rally had run too far, too fast.

The benchmark MSCI EM Currency Index advanced 0.2%, paring its early gains that had put it on track for its best annual performance since 2017. Minutes from the US Federal Reserve’s latest meeting showed policymakers were united around a strategy to “proceed carefully” on future interest-rate moves. Emerging-market stocks edged higher for a second day.

Meanwhile, stocks in Argentina soared as local markets reopened after a holiday following Javier Milei’s decisive victory on Sunday. Veteran emerging markets investor Mark Mobius said Milei’s plan to dollarize the Argentine economy would provide a huge lift to the nation, while HSBC Holdings Plc. strategists said US-traded Argentine stocks could climb back to one-year highs. 

Emerging-market currencies have been gaining ground since early October, as improving US inflation data sparks expectations for an end to interest-rate hikes by the Fed and a potential cut by mid-2024. That trend faltered today, at least in Latin America.

“The combination of low liquidity in the midst of the Thanksgiving week, the fact that we are approaching the end of the year, and the fact that some currencies have appreciated a lot recently may explain the poor trading dynamics,” said Benito Berber, chief Latin American economist for Natixis. “There is not much to gain from a trading desk perspective given the strong levels and the approaching end of the year.”

Mexico’s peso touched its strongest since September earlier in the session before pulling back to weaken, while the Brazilian real also slipped back from levels near recent highs. The Chilean peso firmed sharply, supported by an improved outlook for the country’s copper exports as the market for the red metal in China tightens amid demand from electric vehicles, solar panels and the power industry.

The recovery for developing-nation currencies comes in a year marked by whipsawing moves, frequently catching traders off-guard with premature wagers on China’s economic growth, a Fed rate pivot and the path of local inflation. After October data showed a sharp deceleration in US consumer-price growth, global markets seemed to reach a consensus that the era of monetary tightening was finally over.

That’s put the dollar on course for its biggest loss in a year this month and bolstered the case for investing in emerging markets.

EM Leaders

Much of the return this year was earned in Latin America and Eastern Europe, where central banks pursued some of the most aggressive rate hikes over the past three years.

The currencies of Poland and Hungary have been the stars of the rebound since early October. Elections in Warsaw that returned a pro-European Union and fiscally prudent alliance to power have helped the zloty, while easing inflation and relatively cautious guidance for central bank easing have supported the forint.

Policymakers in Budapest cut their main interest rate by 75 basis points on Tuesday, in line with guidance, resisting government pressure for a bolder move in lowering the European Union’s highest borrowing costs.

Besides these two currencies, some of the best carry returns this year — where investors borrow in currencies like the dollar and invest in higher-yielding countries — have come from Latin America. The Colombian and Mexican pesos and the Brazilian real have each handed investors double-digit gains, while bets on the Turkish lira and Malaysian ringgit have lost the most. 

Goldman Sachs Group Inc. strategists expect emerging markets to continue to provide attractive carry returns in 2024. Half of the 10% returns expected from sovereign bonds next year will come from carry, analysts including Andrew Tilton wrote in the bank’s outlook report.

--With assistance from Andras Gergely and Karl Lester M. Yap.

(Updates paragraphs one through six with Latin American currency moves, Fed minutes. Adds Hungary rate decision in paragraph 11.)

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