SAO PAULO, Aug 10 (Reuters) - Latin American currencies treaded water on Thursday as bets that U.S. interest rates will take longer to rise offset mounting geopolitical tensions surrounding North Korea. An unexpected drop in U.S. producer prices in July was the latest economic report to raise doubts over the Federal Reserve's plans to hike rates once again this year. Although economic growth has shown signs of accelerating, subdued price pressures have kept the U.S. central bank on a cautious stance. Signs that President Donald Trump may fall short on promises to raise spending and cut taxes have also cast a shadow on hopes of a sharp pickup in economic activity. A slower path of interest rate hikes in the world's No. 1 economy could support demand for high-yielding assets. On Thursday, those expectations counteracted lingering risk aversion that drove a selloff in emerging markets the day before. The currencies of Chile, Mexico, Brazil and Colombia were nearly flat. They had weakened on Wednesday after North Korea said it was "carefully examining" plans for a missile strike on the U.S. Pacific territory of Guam just hours after Trump said any threat to the United States would be met with "fire and fury." The investor mood remained sour in stock markets, however, with nearly all bourses in the region trading lower. Brazil's benchmark Bovespa stock index dropped 1.2 percent as expectations grew that the government would have to aim for a wider budget deficit in 2017 and 2018, dealing a blow to investors' hopes of increased austerity. "It is clear now that markets had been overly optimistic and that fixing Brazil's fiscal issues will take a lot longer than expected," a portfolio manager at a major investment bank said. Ultrapar Participações SA shares tumbled to a five-month low after the gas distribution company reported a 33 percent drop in second-quarter net profit and Credit Suisse Securities analysts lowered their recommendation on the stock. Weaker-than-expected earnings reports also weighed on shares of logistics operator Rumo SA and wireless carrier Oi SA. Shares of Banco do Brasil SA, however, were a rare bright spot, rising 0.5 percent in a sign of investor trust in Chief Executive Officer Paulo Caffarelli's strategy for turning around the state-controlled lender.
Key Latin American stock indexes and currencies at 1730 GMT:
Stock indexes Latest Daily YTD pct pct change
MSCI Emerging Markets 1,055.34 -1.27 23.97 MSCI LatAm 2,746.61 -1.31 18.9 Brazil Bovespa 66,850.81 -1.21 11.00 Mexico S&P/BVM IPC 50,703.46 -1.04 11.09 Chile IPSA 5,060.44 -0.51 21.90 Chile IGPA 25,246.31 -0.46 21.76 Argentina MerVal 21,178.99 1.21 25.19 Colombia IGBC 10,755.48 -0.9 6.19 Venezuela IBC 183,275.56 -0.5 478.06 Currencies Latest Daily YTD pct pct change
Brazil real 3.1572 -0.18 2.91 Mexico peso 17.9350 0.03 15.66 Chile peso 647.8 0.03 3.54 Colombia peso 2,996.8 0.14 0.16 Peru sol 3.249 -0.03 5.08 Argentina peso (interbank) 17.7350 -0.20 -10.49 Argentina peso (parallel) 18.38 0.16 -8.49
(Reporting by Bruno Federowski; Editing by Lisa Von Ahn)