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EMERGING MARKETS-Lira hit by inflation; emerging assets at multi-month highs pre-Fed
May 3, 2017 / 8:57 AM / 3 months ago

EMERGING MARKETS-Lira hit by inflation; emerging assets at multi-month highs pre-Fed

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LONDON, May 3 (Reuters) - The Turkish lira slipped off 4-1/2-month highs on Wednesday, hit by higher inflation and President Tayyip Erdogan's new attack on interest rate rises, while moves across most other emerging markets were subdued before a Fed meeting.

The U.S. Federal Reserve is widely expected to signal a June rate rise, though a set of lacklustre data gave pause to the dollar and Treasury yields. That allowed emerging assets to cling to multi-month highs they hit after a raft of robust purchasing managers indexes across the developing world .

MSCI's emerging equity index inched to a new 23-month high, while Asian currencies such as the Indonesian rupiah, Malaysian ringgit and Taiwan dollar rose marginally to touch the highest in 10 months, five months and 31 months respectively against the dollar .

In emerging Europe, currencies weakened slightly, with the lira, up 6.5 percent since early-April and rallying after last week's unexpected policy tightening, slipping after data showed April inflation nearing 12 percent, an eight-year high.

"CPI surprised on the upside but the effect on the lira is limited," said Petr Krpata, chief EMEA FX and interest rate strategist at ING.

"We all know CPI will continue rising because of the (past) fall in the lira, but the point is that the central bank has already reacted and has therefore regained some of its credibility," he said, referring to the recent rate rise.

The data heaps pressure on the central bank to further tighten monetary policy, potentially setting up a conflict with Erdogan who said Turkey would "certainly" bring down interest rates and described them as the cause of inflation.

Analysts at Capital Economics noted the inflation rise was down to food prices while core inflation had declined slightly.

"We still think headline inflation has probably peaked and should start to reverse course," they wrote. "Just as importantly, pressure from President Erdogan on the central bank to cut interest rates has built again."

The rouble slipped 0.4 percent while bond yields rose off 3-1/2-year lows, hit after last week's 50 basis point rate cut.

The Czech crown was flat against the euro after weakening 0.2 percent on Tuesday following the collapse of the government . The central bank is expected to leave rates on hold after last month scrapping the crown's exchange rate cap.

Investors are also looking at Nigeria where the naira is trading on the black market almost on par with a special rate for investors, as the central bank has stepped up dollar sales . Nigerian shares are at three-month highs.

Activity is likely to thin out over the day as investors wait to hear the Fed's message. But many reckon that with two more rate rises already priced by the market for 2017, only a very hawkish message will swing the dollar sharply.

"What had a big effect on the dollar is that (U.S. President Donald) Trump got in and people were looking for reflation... but with the relation trade fading and Trump being a disappointment the dollar has probably topped," Krpata of ING said, referring to Trump's campaign promises for stimulus.

For GRAPHIC on emerging market FX performance 2017, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 987.83 -0.36 -0.04 +14.56

Czech Rep 997.18 -4.80 -0.48 +8.20

Poland 2392.09 +15.22 +0.64 +22.80

Hungary 32668.52 -234.10 -0.71 +2.08

Romania 8228.90 +8.80 +0.11 +16.14

Greece 738.29 +4.36 +0.59 +14.71

Russia 1100.17 -20.05 -1.79 -4.53

South Africa 47249.50 +110.65 +0.23 +7.62

Turkey 94198.68 -157.23 -0.17 +20.55

China 3135.84 -7.88 -0.25 +1.04

India 29935.03 +13.85 +0.05 +12.43

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2017

Czech Rep 26.89 26.91 +0.06 +0.43

Poland 4.20 4.20 -0.07 +4.78

Hungary 311.95 311.59 -0.12 -1.00

Romania 4.55 4.55 +0.01 -0.27

Serbia 123.04 123.02 -0.02 +0.25

Russia 57.13 57.01 -0.21 +7.23

Kazakhstan 315.42 315.38 -0.01 +5.78

Ukraine 26.51 26.54 +0.09 +1.85

South Africa 13.37 13.34 -0.25 +2.67

Kenya 103.00 102.95 -0.05 -0.61

Israel 3.61 3.60 -0.01 +6.81

Turkey 3.54 3.53 -0.27 -0.25

China 6.89 6.89 +0.04 +0.74

India 64.14 64.15 +0.02 +5.94

Brazil 3.15 3.15 +0.03 +3.26

Mexico 18.80 18.75 -0.26 +10.19

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 318 -1 .08 7 81.94 1

All data taken from Reuters at 08:47 GMT. Currency percent change calculated from the daily U.S. close at 2130 GMT.

Additional reporting by Marc Jones; Editing by Mark Trevelyan

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