* Brazil's Bolsonaro rejects econ ministry's welfare proposal * Historic fall in Mexico's Q2 GDP weighs on peso * Argentina formally starts talks with IMF for a new program * Key speech from U.S. Fed's Powell eyed for Thursday (New throughout, updates prices, market activity and comments, adds bullets) By Susan Mathew and Shreyashi Sanyal Aug 26 (Reuters) - Brazil's real tumbled on Wednesday after President Jair Bolsonaro rejected a proposed welfare reform, while the Mexican peso retreated from a one-month high as data showed the sharpest economic contraction ever. The real fell 1.4% after posting its biggest daily rise in two weeks on Tuesday, after Bolsonaro cast aside a proposal by Economy Minister Paulo Guedes for a new cash welfare program called "Renda Brasil" because it would involve cutting other social programs. Mexico's peso fell as much as 0.4% after data showed GDP fell 17.1% in April to June, from the previous three-month period in seasonally adjusted terms, as the coronavirus pandemic hammered the economy. In annual terms, the economy contracted 18.7% in the second quarter compared to a year earlier. But monthly data showed an improvement in June from May. Ahead of a speech by U.S. Federal Reserve Chairman Jerome Powell at the annual Jackson Hole conference on Thursday, the dollar edged higher. Investors are watching for possible new steps to prop up the U.S. economy. "Hints of further easing or some urgency in the tone of Fed's dovish commitment can help underpin the dollar's softness but the lack of clarity could drag it higher especially when dollar short positioning is near record high," said FX analysts at Maybank. Despite higher copper prices, top producer Chile's peso was flat after Moody's cut the country's outlook to negative citing a rising debt-to-GDP ratio which poses a "key credit concern". It added that the economic drag from the pandemic as well as unrest over social inequality could pressure Chile's commitment to fiscal prudence. Fitch and Standard & Poor's downgraded Chile's outlook to negative in March and April, respectively. Declining oil prices saw crude exporter Colombia's peso extend losses to a fifth straight session to stay near lows not seen since mid-May. In Peru, the Congress approved a law on Tuesday that allows citizens to partially draw down their contributions to the state pension fund, despite strong opposition from the government. The sol currency had hit all-time lows last session. Argentina said its government has formally initiated talks with the International Monetary Fund on a new program on Wednesday, as the country takes the next step to recover from a crippling debt crisis. The peso weakened against the dollar. Key Latin American stock indexes and currencies at 1935 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1118.27 0.32 MSCI LatAm 1935.60 -1.38 Brazil Bovespa 100352.87 -1.73 Mexico IPC 37736.07 -1.34 Chile IPSA 3858.55 -1.01 Argentina MerVal 46147.91 -0.926 Colombia COLCAP 1228.19 -0.19 Currencies Latest Daily % change Brazil real 5.6022 -1.35 Mexico peso 21.9290 -0.20 Chile peso 785.8 -0.01 Colombia peso 3829.41 0.88 Peru sol 3.5698 0.45 Argentina peso (interbank) 73.8500 -0.05 Argentina peso (parallel) 134 2.24 (Reporting by Susan Mathew and Shreyashi Sanyal in Bengaluru; Editing by Andrea Ricci and David Gregorio)
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