September 13, 2012 / 8:22 AM / 5 years ago

EMERGING MARKETS-Pause after rally ahead of Fed meeting

LONDON, Sept 13 (Reuters) - Emerging equities eased off four-month highs on Thursday, pausing after the past week's 4 percent rally ahead of a U.S. Federal Reserve meeting that is expected to unveil a third round of bond purchases to support the economy.

The central bank will release its decision at 1630 GMT, with Chairman Ben Bernanke to hold a news conference two hours later. A Reuters poll of investors showed the odds of a third round of quantitative easing, or QE3, rose to 65 percent.

MSCI's emerging equities slipped 0.2 percent after five sessions of gains that have been fuelled by an improving picture in the euro zone.

"We saw a bit of profit-taking and I expect a wait-and-see game (before the Fed), with some temptation on part of investors to take advantage of the prior rally to square positions, but it's not very indicative of sentiment," said Benoit Anne, head of emerging markets strategy at Societe Generale.

Emerging markets were also pressured by a 0.8 percent drop in Shanghai where banks were dragged down by reports they would be forced to step up lending for stimulus projects

Central European currencies were in negative territory versus the euro, with the Czech crown inching further off recent one-year highs and the Polish zloty easing from two-week peaks. Their Asian peers also weakened ahead of the Fed decision.

In Russia, the rouble and stocks eased from four-month highs ahead of a central bank meeting which according to some analysts could deliver an interest rate rise.

Slowing growth and rising inflation are creating a dilemma for the central bank which is trying to establish its inflation-targeting credentials. Inflation is about to breach the official target of 5-6 percent for the whole of 2012.

"We think that, on balance, the (central bank) will prioritise building credibility ahead of the transition to a pure inflation targeting regime and expect two 25 basis points hikes of the overnight auction rate this year with the first one due already today," SEB analysts said in a note.

Emerging sovereign dollar bond yield spreads were at 293 bps above Treasuries, the tightest since early-July 2011.

Reporting by Sujata Rao

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