EMERGING MARKETS-FX, stocks set for worst month in a year as higher bond yields lift dlr

* EM currencies set for biggest monthly losses since March 2020

* Lira on course for worst month since 2018 after cenbank overhaul

* South African rand, Russian rouble edge higher

* EM stocks shrug off China’s strong factory growth in March

March 31 (Reuters) – Emerging market stocks and currencies were set to close Wednesday with their biggest monthly declines in a year, as signs that a U.S. economic rebound would outpace other developed markets lifted demand for the dollar and U.S. equities.

The MSCI index of emerging market currencies was up about 0.1% by 0800 GMT, but was still on track to end the month down about 1.1%, its biggest percentage decline since the coronavirus-driven crash in March last year.

High-yielding currencies in the region have come under pressure from a rising dollar, as strong U.S. macroeconomic data and inflation concerns have pushed bond yields to one-year highs.

Focus later in the day will be on U.S. President Joe Biden’s outline of how he intends to pay for a $3 trillion-$4 trillion infrastructure plan, a proposal that is likely to include tax increases.

The Turkish lira eased about 0.3% against the dollar, bringing total declines to about 11% in its worst month since 2018, following a shock central bank overhaul earlier in March that sparked concerns of capital controls and higher inflation.

All eyes will now be on the first central bank meeting on April 15 under new governor Sahap Kavcioglu, a critic of high interest rates.

“Regardless of what he does, he will struggle to build credibility with the markets given the nature of his appointment and ideological leanings, giving him absolutely zero margin for error,” Patrick Curran, senior economist at Tellimer, told the Reuters Global Markets Forum.

“If he cuts rates before inflation is under control and lira stability is restored, it will initiate a negative feedback loop of lower real interest rates, currency depreciation, and rising inflation.”

The South African rand, one of the high-yielding currencies hit by the dollar’s recent strength, was up about 0.5%. The currency has been volatile this week, with a patchy recovery reflected in local economic data and a slow roll-out of vaccines stifling demand.

The Russian rouble recovered from losses on Tuesday, but gains were limited by the lingering threat of new U.S. sanctions that outweighed the positive impact of higher oil prices.

A basket of emerging market stocks fell about 0.4% and was on track to end March with losses of about 1.9% – its biggest monthly decline since March 2020, shrugging off data showing China’s manufacturing activity expanded at the quickest pace in three months.

For GRAPHIC on emerging market FX performance in 2021, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see tmsnrt.rs/2OusNdX

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