* Brazil restarts currency intervention after Fed
* Speculation that Chile, Colombia could follow
* Mexico's QE3 enthusiasm stands out from crowd
By Krista Hughes and Michael O'Boyle
MEXICO CITY, Sept 14 The U.S. Federal Reserve's latest round of stimulus spotlights a gulf between Mexico and its Latin American neighbors as the region girds itself for a likely revival of the "currency war."
While Mexico embraced the Fed's decision to start a third round of bond-buying, Brazil vowed to unleash an arsenal of new measures to combat what it fears could be a sharp appreciation in its currency.
A stronger real could not come at a worse time for Brazil, which is battling slowing growth with a raft of measures to boost the domestic economy. This contrasts with Mexico, which is growing roughly twice as quickly as its rival and has been fretting about a weak peso pushing up prices. Close links to the United States give it a big stake in stronger U.S. growth.
"Mexico is clearly one of the few countries in Latin America where you don't have any resistance to peso strength, and you are unlikely to do so, because the central bank prefers a hands-off attitude," said Clyde Wardle, a strategist at HSBC in New York. "That does set Mexico apart."
Latin American currencies surged to new highs after the Fed's news, with Chile's peso hitting a one-year high against the U.S. dollar and Mexico's rising to a five-month peak on bets that yield-seeking investors will flood to the region, driving asset prices higher.
During the Fed's second round of bond buying in late 2010 and the first half of 2011, a rush of capital pushed the Brazilian real up 12 percent against the dollar while the Mexican and Chilean pesos both gained 8 percent.
Economists said a fresh round of currency intervention was in the cards, with Brazil kicking off o n F riday with two central bank interventions in two hours. Speculation is mounting about increased efforts in Chile and Colombia as well.
South American officials, worried that a rise in their currencies will price their exports out of the market and drag on growth, have a history of intervening to limit currency gains.
But in Mexico, policymakers face a different dynamic as the peso - one of the most liquid emerging market currencies and often used as a hedge for emerging market risk - has weakened about 30 percent since before the financial crisis.
Mexican central bank Governor Agustin Carstens told Reuters the Fed's new bond buying program, dubbed QE3, would help the economy, giving no sign policymakers would try to stem the peso's rise.
In fact, Carstens said the stronger peso would help limit inflation by making imported goods cheaper - a much-needed break for the Banco de Mexico, which is confronting a spike in inflation to its highest level in more than two years due to fresh food prices.
MEXICO AT ODDS
Mexico's laissez-faire stance will put it in a different class from Latin American counterparts that intervene to cap currency gains, like Brazil, which also fears competition from Asian powerhouse China and its yuan.
Countries that keep their currencies cheap will face higher prices for imported goods at the same time a flush of cheap money probably drives commodity prices higher, economists said.
Although price pressures are subdued in Chile, Colombia and Peru - meaning their central banks may not worry too much about the downside of intervention - inflation accelerated to 5.24 percent in Brazil last month.
"QE3 will end up having two different kinds of effects on inflation," said BNP Paribas economist Nader Nazmi.
"In countries that fight against appreciation... the price of commodities will increase. This could lead to higher inflation in countries that do not allow their exchange rate to appreciate."
Reacting to higher inflation by raising interest rates would make currencies even more expensive, a policy Catch-22 that the region faced during the Fed's previous stimulus, when Brazilian Finance Minister Guido Mantega coined the term "currency war."
The phrase has been adopted by officials in Colombia, whose peso has been the fourth-biggest gainer worldwide this year, firming 7 percent since January despite back-to-back interest rate cuts. The peso rose 0.4 percent on Friday.
"This shows that we should not remain silent in Colombia and that we will have to respond to these kinds of decisions from the United States," Finance Minister Mauricio Cardenas said.
Chile's Finance Minister Felipe Larrain had said even before the Fed's Thursday announcement that the country was worried about another round of stimulus, and the peso is approaching levels that have sparked intervention in the past.
"These levels for the peso are a concern for authorities. Although we don't expect imminent action, such as an outright intervention, we do expect to see in the short-term, over the next 30 days, verbal interventions or announcements that try to contain the currency's appreciation," said Ruben Catalan, senior analyst at Bci in Santiago.