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EM central bankers rush to shore up currencies

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Czech central bank expected to hold rates

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EM stocks down 1.2%, FX down 0.4%

By Lisa Pauline Mattackal

Dec 19 (Reuters) - Emerging market assets dropped on

Thursday after investors were jolted by the U.S. Federal

Reserve's signals of fewer rate cuts next year, with global

stocks falling and the dollar rising against most EM currencies.

As expected, the Fed trimmed borrowing costs on Wednesday by

25 basis points. However, Federal Reserve Chair Jerome Powell

said more reductions hinge on further progress in lowering

stubborn inflation.

Fed policymakers' projections show they now expect just two

quarter-percentage-point rate reductions by the end of 2025.

The changed outlook hit emerging market assets as the dollar

and U.S. Treasury yields rose. MSCI's emerging markets currency

index dropped 0.4% at 0930 GMT to its lowest

level since August.

"The pace of the selling in USTs has been a massive green

light for FX traders to re-engage with USD longs, and they have

done so liberally, with EM FX being carved up," said Chris

Weston, head of research at Pepperstone.

The Czech crown was little changed against the

euro ahead of its central bank policy announcement later in the

day, where policymakers are expected to pause a one-year easing

drive and keep rates at 4%.

Hungary's forint dipped 0.4% against the euro, set

for a third session of declines though it rose 0.5% against the

dollar after steep losses on Wednesday.

An index of EM stocks dropped 1.2%, on course for

its worst day in over one month. Benchmark indexes in Greece

, Poland, Turkey and South Africa

fell between 0.3% and 1.2%.

The change in the Fed's outlook will be a hurdle for

emerging markets next year, with higher rates denting the appeal

of riskier EM assets and the dollar's rise likely to drive

foreign capital out of their markets and weigh on currencies.

It also further complicates the picture for EM central

bankers. The Philippine central bank cut rates as expected,

Taiwan kept rates on hold, while Mexico's central bank is

expected to cut by 25 basis points later in the day.

The FX declines sent EM central bankers rushing to prop up

their currencies, with central banks in Brazil and India selling

dollars, while officials in Indonesia and Thailand said they

would act to prevent excessive volatility.

Dollar bonds for riskier emerging economies also came under

pressure, with dollar bonds in Nigeria, Egypt and Kenya down

around 2 cents on the dollar.

"Initially people had priced aggressive rate cuts from the

Fed ... they now expect a more measured approach," said a trader

with a Kenyan commercial lender.

Turkey's lira extended its fall past 35 per

dollar touched Wednesday.

Russia's rouble firmed 1.3% against the dollar after

Russian President Vladimir Putin said the economy may grow by 4%

this year but flagged rising inflation.

South Africa's rand traded 0.4% higher against the

dollar.

HIGHLIGHTS:

** U.S. tariffs would hit Hungary's growth, boost inflation,

central bank says

** China expected to leave lending benchmarks unchanged amid

rate risks

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