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SAO PAULO, Dec 29 (Reuters) - Brazil's real currency and stocks closed 2016 with the best yearly performance in seven years, boosted by hopes that centre-right President Michel Temer would curb public spending following the ouster of his leftist predecessor Dilma Rousseff.
The real firmed 21.5 percent in 2016, breaking a five-year losing streak. It was by far the best-performing currency in Latin America, and second only to the Russian rouble among emerging markets.
Between 2011 and 2015, the real had lost more than half of its value as concerns over Brazil's ballooning public debt added to an emerging market rout.
Brazil's benchmark Bovespa stock index rose 38.9 percent in 2016 and advanced 68.8 percent in dollar terms, the world's best performing emerging market.
Shares in state-controlled firms led the gains, with oil company Petróleo Brasileiro SA and lender Banco do Brasil SA doubling. Markets will be closed on Friday ahead of the New Year's Day holiday.
Whether the rally will continue hinges on Temer's ability to deliver fiscal and structural reforms amid corruption accusations encircling senior figures in his administration, analysts said.
Meanwhile, doubts linger about U.S. President-elect Donald Trump's pledges of heavy infrastructure spending and tax cuts.
If the Federal Reserve reacts by increasing rates faster than expected, that would likely weigh on demand for high-yielding Brazilian assets, according to Jason Vieira, chief economist at Infinity Asset Management Ltda.
"It's hard to decipher which of these forces will prevail," he said.
Analysts polled by Reuters this month expected the real to weaken to 3.49 to the dollar in the next 12 months, from 3.25 currently. The estimates ranged between 2.98 and 3.88 reais, a sign of increased uncertainty.
Temer took over from Rousseff after she was impeached for allegedly meddling with fiscal accounts. He has pledged to reverse the interventionist policies of her first term in a bid to end Brazil's deepest recession in decades.
Temer's government is likely to meet its target for the primary deficit - excluding debt payments - of 163.9 billion reais ($50.4 billion) in 2016, which it aims to cut to 143 billion reais next year.
Nevertheless, it forecasts gross debt to grow to 76.9 percent of gross domestic product (GDP) in 2017 from 70.5 percent in November.
Markets have cheered his administration's decision to impose a ceiling on growth in public spending, which was approved by Congress this month. He has also proposed reforms to the country's pension system, labor laws and tax code.
But corruption accusations against senior government figures, including Temer himself, could weaken the ruling coalition and derail reform efforts.
Volatility driven by the political newsflow, as well as Trump's unexpected victory, led Brazil's central bank to halt currency interventions.
It has stayed out of the market since Dec. 13 after intervening on a near-daily basis since the beginning of the year.
Many traders expect it to return to selling traditional currency swaps, which function like selling future dollars, in order to smooth potential volatility early next year.
"It is likely that the central bank will roll over at least some of the swaps maturing in February," Cleber Alessie, a trader with H. Commcor DTVM Ltda brokerage, said.
"It is not in its interest to let them all expire and pressure the real given what is to come in 2017."
The central bank holds $26.6 billion worth of swaps in its balance sheet, down from over $100 billion late last year. About $6.4 billion worth of swaps are set to expire on Feb. 1.
Reporting by Claudia Violante and Bruno Federowski; Writing by Bruno Federowski; Editing by Bernadette Baum and Nick Zieminski