EMERGING MARKETS-Latin American assets extend losses as dollar rises, high yields weigh

By Utkarsh Hathi and Purvi Agarwal

Sept 24 (Reuters) - Most Latin American assets came under pressure again on Thursday as a stronger dollar and a lack of progress on ending the Middle East conflict dented sentiment, while the Bank of Mexico held interest rates steady.

Negotiations between the US and Iran stalled, while Iranian airlines were barred from neighboring countries in response to new US sanctions, days after dueling speeches from the countries' leaders at the UN General Assembly.

Oil prices climbed about 3% to a one-week high but trade remained volatile, as markets assessed reports the US and Iran were exploring plans to reopen the Strait of Hormuz.

Still, the yield on the 30-year US Treasury climbed to its highest level since 2004, as elevated energy prices and a resilient economy rekindled fears of prolonged inflation, and raised bets on further interest rate hikes by the US Federal Reserve.

The US dollar index also rose 0.2% to a fresh two-month high.

"There's been very little place to hide on this dollar," said Alejandro Cuadrado, global head of FX and Latin America strategy at BBVA.

"We are in the middle of a bigger wave and the persistent pressure has now extended into Latin America and challenges that resilience."

MSCI's index tracking the region's equities .MILA00000PUS declined 1.7%, while its currency equivalent .MILA00000CUS fell 1.1%. The latter hit its lowest level since July 29.

Chilean stocks .MICL00000PUS fell to nearly a two-month low, down 2.3%, pressured by declining copper prices.

Among currencies, the Colombian peso led losses with a 2.1% drop, reaching its lowest level since July 3.

BANK OF MEXICO'S RATE DECISION

The Bank of Mexico held its benchmark interest rate steady at 6.50% as expected, though it dropped guidance that explicitly suggested policymakers would continue to keep borrowing costs at that level.

The move comes hours after data showed that inflation accelerated more than expected in the first half of September.

"The communications suggest that Banxico is likely to remain on hold ... Banxico will eventually shift its tone, particularly with inflation likely to remain high through 2027," said Liam Peach, senior EM economist at Capital Economics.

"The odds remain tilted towards an interest rate hike over the next six months or so."

The Mexican peso weakened 1.2% to its lowest levels since early April. It has also been under pressure due to uncertainty around Mexico's trade negotiations with the US, with the fourth round of talks now expected to take place later in October instead of next week, according to a senior Mexican official.

Market participants said the Brazilian real has been relatively resilient in comparison and held well against the dollar's advance due to higher oil prices and some optimism around the outcome of next month's presidential election.

Brazil's central bank projected inflation close to its 3% target at the policy horizon for its next interest rate decision, reinforcing expectations for further rate cuts.

The real edged 0.4% lower, while Brazil's stock index Ibovespa .BVSP traded 0.8% lower.

The government also widened its primary deficit forecast for 2026 to 80.9 billion reais ($15.61 billion).

Peru's sol lost 1.1% against the dollar.

Key Latin American stock indexes and currencies at 2008 GMT