* EM FX index hits 3-month low
* Dollar, U.S. yields rise after Senate passes $1.9 trln package
* Several big investment banks say they are reducing EM exposure
* Turkey's lira drops 2.6%; S.African rand, Brazil's real down 1%
* Russian rouble give back gains made on buoyant oil prices (New throughout, updates prices, market activity and comments)
By Susan Mathew and Shreyashi Sanyal
March 8 (Reuters) - An index of emerging market currencies fell sharply on Monday, headed for its biggest drop since a pandemic-induced slide a year ago, as rising U.S. Treasury yields lifted the dollar and dulled appetite for riskier assets.
MSCI's index of developing market currencies .MIEM00000CUS slid 0.8% with China's onshore yuan CNY= slipping 0.5% to turn negative on the year, while Turkey's lira TRY= dropped 2.6% to its lowest in almost three months. Africa's rand ZAR= , Brazil's real BRBY and Mexico's peso MXN= all weakened 1% against a surging dollar.
"Last week's leg higher in U.S. breakevens precluded real yields from jumping beyond -60 basis points, but the 40 basis point move over the past month or so clearly did not go unnoticed by EM FX and fixed income assets," said Luis Costa at Citi.
The dollar hit its highest since late-November against a basket of major rivals as yields on U.S. Treasuries climbed to multi-month peaks following the passage of a $1.9 trillion fiscal aid package by the U.S. Senate and strong payrolls data on Friday. FRX/ US/
emerging market currency index is down 1.3% year-to-date with gains made on optimism from a faster global recovery and vaccine rollouts being undone by fears of a likely pick up in inflation.
The latest moves prompted a number of big banks to shift their stance on emerging currencies.
Morgan Stanley (NYSE: MS ) strategists downgrade their view on EM currencies for the second time in as many weeks, predicting the sell-off would continue across local debt markets and credit.
"We expect the weakness to be fairly orderly, given the global recovery cycle, with EMFX weakening by 4-5%," said strategist James Lord in a note to clients.
However, he did voice concerns about deteriorating fiscal balances and slow progress in containing the COVID-19 outbreak in many developing economies.
JPMorgan (NYSE: JPM )'s local currency debt index has returned -5.4% since the start of the year, while hard-currency debt benchmark is down 4.6%, according to Refinitiv data.
Turkey's lira has had a near-double digit loss over the past 11 sessions. Citi and JPMorgan expect Turkey's central bank to hike rates by as much as 100 basis points in March to check inflation pressures. Rising crude prices and a depreciating lira put more pressure on the oil importing country's economy. thin trading, crude producer Russia's rouble RUB= fell up to 0.3% in the interbank market, giving up gains made on rising oil prices. Trading on the Moscow exchange was closed on Monday for a holiday.
Stocks in the developing world .MSCIEF sank 1.7% to a two-month low. The EM equity index was pulled sharply lower by a 3.5% fall in China mainland stocks - their worst tumble in around eight months. .SS
Key Latin American stock indexes and currencies at 1855 GMT:
change MSCI Emerging Markets
change Brazil real
Colombia peso COP=
0.80 Peru sol
-0.22 (interbank) ARS=RASL
2.13 (parallel) ARSB=
For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX
For TOP NEWS across emerging markets CENTRAL EUROPE market report, see CEE/
For TURKISH market report, see .IS
For RUSSIAN market report, see RU/RUB
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