October 18, 2018 / 10:16 AM / 10 months ago

EMERGING MARKETS-China worries hit stocks, lira gains as dollar cools

* U.S. refrains from naming China currency manipulator

* Fed minutes show policymakers undivided on rate hikes

* Turkey’s lira hits new two-month highs

By Sruthi Shankar and Aaron Saldanha

Oct 18 (Reuters) - Emerging-market shares resumed this year’s declines on Thursday as Chinese stocks tumbled to four-year lows, but the Turkish lira hit two-month highs as the dollar weakened and ties with the United States showed signs of improving.

The MSCI index of emerging-market stocks was set for its first decline in three days, driven by a drop of almost 3 percent by China’s Shanghai Composite index .

Stock markets in South Korea, Taiwan, Russia and Turkey all fell.

Chinese Premier Li Keqiang said the pressure on his country’s economy had grown, adding to fears about the damage from a bitter trade dispute with the United States.

The onshore yuan fell to a 21-month low of 6.9422 to the dollar at one point, before recovering to 6.9360.

The U.S. government refrained from naming China as a currency manipulator, but flagged worries about the country’s lack of currency transparency and the recent weakness in the yuan.

“There were concerns the U.S. might label China a currency manipulator. It didn’t occur but possibly set the grounds for that in the future and maybe one reason why Asian markets came under pressure,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

Minutes from the U.S. Federal Reserve’s latest meeting showed policymakers generally agreed borrowing costs would rise further. That put more pressure on high-yielding emerging markets, which have seen capital flow out this year as returns on U.S. bonds rose.

However, the dollar handed back early gains as investors looked past the Fed minutes.

Turkey’s lira has strengthened since Friday, when Turkey released a U.S. pastor who has been at the centre of a row between Ankara and Washington, reflecting growing optimism about an improvement in ties with the United States.

“We expect the current sanctions to be lifted. We already see that access to international financing has increased with the Eurobond issuing,” a foreign exchange trader at a local bank said.

“Moreover, the expectation that Turkey may receive the exemption from the Iran sanctions that will be imposed in November has started to form in the markets. It is causing the Turkish lira to outperfrom EM peers.”

The central bank raised rates by 625 basis points last month in an effort to bolster the lira. Expectations for next week’s meeting may be shaped by the results of an inflation expectations survey later on Thursday.

For GRAPHIC on emerging market FX performance 2018, see tmsnrt.rs/2egbfVh

For GRAPHIC on MSCI emerging index performance 2018, see tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see (Reporting by Sruthi Shankar and Aaron Saldanha in Bengaluru, additional reporting by Nevzat Devranoglu in Ankara, editing by Larry King)

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