Reuters - Turkey's lira gained for a second straight day on Tuesday on bets of a steep interest rate hike, while other emerging market currencies and stocks rose on growing expectations that more developing countries would tighten monetary or fiscal policy.

Hopes for strong policy action in leading developing nations brought relief to an emerging markets rout that gained traction last week as investors, fearing less U.S. stimulus and weaker Chinese growth, worried about a currency meltdown in Argentina.

A sudden stampede of investors out of emerging markets could hurt the economic prospects of developing countries, with potential spillover into developed nations just as the U.S. Federal Reserve prepares to cut back on monetary stimulus.

"There seems to be a concerted tightening trend underway in the more fragile emerging market countries brought about by the strong sell-off reality check," strategists with Brown Brothers Harriman said in a research note.

"The question is, will this be enough to stop the bleeding? We think it will help, but it is probably not enough."

After hitting a 4-1/2 month low on Monday, the MSCI emerging equity index rose 0.4 percent. The Latin American portion of the index also climbed 0.4 percent.

Still, demand for protection against volatility in exchange-traded funds that invest in emerging markets was on the rise on the Chicago Board Options Exchange, with a key volatility index jumping over 44 percent since the
beginning of last week.

The lira gained about 1 percent to 2.256 per dollar after briefly touching a record low of 2.39 on Monday, as investors bet Turkey's central bank will lift its benchmark interest rate by 225 basis points to 10 percent at the end of an emergency meeting later on Tuesday.

An aggressive rate hike would mark Turkey's return to more orthodox monetary policies after unsuccessful attempts to support the currency with forex auctions, liquidity adjustments and verbal intervention. It would also likely put the central bank at odds with Prime Minister Tayyip Erdogan, who has publicly condemned rate increases.

India's rupee rose about 1 percent after its central bank unexpectedly raised its benchmark interest rate by 25 basis points to counter inflation.

BRAZILIAN REAL STRUGGLES
Brazil's real closed little changed at 2.4256 per dollar after losing more than 3 percent of its value over the past seven sessions as traders bet that rate hikes in Turkey and India would ease the pressure on emerging markets in general.

Bolstering bets on additional interest rate hikes in Brazil, central bank chief Alexandre Tombini said in an interview with the Financial Times that the bank "would certainly adjust policy again if need be."
Brazil has already raised its benchmark Selic rate by 325 basis points to 10.5 percent since last April and policymakers are running out of room to raise borrowing costs much higher without badly damaging an already sluggish economy.

Brazil's central bank has also tried to smooth out the real's weakening trend with daily sales of currency swaps, derivatives that provide investors with protection against currency losses.

But fears that President Dilma Rousseff would balk at reining in public spending in an election year have weighed on the real, which shed 13 percent of its value in 2013.

In an attempt to differentiate Brazil from other fragile emerging economies, Finance Minister Guido Mantega said the government will soon announce budget cuts to ensure the country's "fiscal soundness."

Mexico's peso rose 0.9 percent in a second straight session of gains as policymakers tried to set the country apart from weaker emerging markets by saying growth-enhancing reforms will soon bear fruit.

In Argentina, however, the peso continued to slide on the black market, dropping 2.4 percent to 12.45 per dollar. That is a steep discount over the official exchange rate, which remained around 8.0 per dollar for a third day
as the central bank sold about $60 million to control the exchange rate, according to traders.

Argentina's official peso rate tumbled over 10 percent last Thursday in its worst single-day loss since the country's 2002 debt default and financial crisis.

"We don't think that the current stability can last for too long," wrote Dirk Willer, emerging markets strategist with Citi, regarding the peso's official exchange rate. "But it will probably not matter too much for global markets outside of the Brazilian real."

The Russian rouble edged 0.2 percent lower as Economy Minister Alexei Ulyukayev said the government could delay plans to move to a floating exchange rate and instead consider limits on the currency, which has already lost 5 percent so far this year.

MORE MONETARY TIGHTENING?
South Africa and Indonesia - which with Brazil, India, and Turkey have been dubbed the "Fragile Five" economies because of their heavy dependence on foreign capital - may follow with interest rate hikes, analysts said.

In the case of South Africa, however, a rate hike is not the most likely outcome when the central bank meets later this week, economists said. Still, the rand was up 0.3 percent at 11.03 per dollar, off a five-year low hit on Monday.

New cash injections from China's central bank and a deal from a trust firm that averted a possible default for a wealth-management product also helped stabilize China, to which many emerging economies are geared.

"The 'managed default' successfully staves off a potentially disruptive default during the Chinese New Year period and the hope is that it limits any systemic ripple effects," Deutsche Bank said in a note to clients.

In the long term, however, investors are concerned about the effects of China's economic slowdown and the Federal Reserve's plan to scale back its monetary stimulus. The Fed is expected to announce a further $10 billion cut in its bond buying when its two-day meeting concludes on Wednesday.

Key Latin American stock indexes and currencies at 1930 GMT

Stock indexes daily % YTD %
Latest change change
MSCI LatAm 2,912.87 0.37 -9.33


Brazil Bovespa 47,840.93 0.29 -7.12

Mexico IPC 40,757.37 -0.26 -4.61

Chile IPSA 3,491.58 -0.83 -5.61

Chile IGPA 17,372.26 -0.69 -4.69

Argentina MerVal 5,638.92 0.59 4.60

Colombia IGBC 12,003.02 -0.29 -8.17

Peru IGRA 15,667.35 -0.75 -0.55

Venezuela IBC 2,817.01 -0.16 2.94


Currencies daily % YTD %
change change
Latest
Brazil real 2.4256 -0.07 -2.84

Mexico peso 13.2500 0.88 -1.66

Chile peso 545.7000 0.88 -3.59

Colombia peso 2002.5000 0.31 -3.52

Peru sol 2.8220 0.00 -1.03

Argentina peso 8.0000 0.06 -18.84

Argentina peso 12.4500 -2.41 -19.68