December 29, 2016 / 10:08 AM / 8 months ago

EMERGING MARKETS-Dollar retreat lifts emerging assets; rouble near 14-mth high

LONDON, Dec 29 (Reuters) - A dollar retreat helped emerging stocks rise to 10-day highs on Thursday and currencies strengthened, led by the rouble which appeared on the cusp of breaking under 60 per dollar for the first time in 14 months.

While emerging markets are pressured by fears about spiralling capital flight from China, state banks' support helped the yuan firm slightly against the dollar, away from recent 8-1/2-year lows.

Offshore yuan however fell to its lowest levels since trading started in 2010, to around 6.98 per dollar. Bets are growing that offshore yuan will weaken sharply, as traders anticipate a rush by Chinese citizens next month to cash in their annual $50,000 foreign exchange conversion quota.

But buying of Hong Kong-listed tech stocks helped the equity index higher. That lifted MSCI's emerging equity index 0.4 percent to 10-day highs, despite Wednesday's Wall Street selloff as markets focused on lower U.S. Treasury yields and a pullback in the dollar.

Emerging currencies mostly strengthened versus the greenback, with focus on the Russian rouble which firmed 0.3 percent to trade just off 14-month highs. The rouble is up 21 percent versus the dollar this year, neck-and-neck with Brazilian real to be the top EM currency performer of 2016.

"The likelihood is rising that the central bank will consider some FX intervention. It won't be very aggressive but you would expect, given the loss in the reserve funds, that they would look to use the opportunity to lean against this strength in the currency," UBS strategist Manik Narain said.

He noted, however, that while authorities were keen to rebuild depleted reserves, they would tread carefully on countering rouble strength which is key for meeting the 4 percent end-2017 inflation target.

"So you are probably talking of modest intervention rather than a sea change," Narain added.

On Russian bond markets, 10-year yields touched two-month lows after a sharp fall at Wednesday's auctions when the Treasury almost completed its 2016 borrowing plans. Yields have tumbled almost 60 basis points this month as oil prices have risen.

There are also clear signs of economic recovery, with manufacturing activity expanding this month at the fastest rate since March 2011.

The Turkish lira also rose 0.15 percent but stayed near record lows, amid fresh evidence of the economy's woes. Its economic confidence index tumbled more than 18 percent to a record low in December, while November tourist arrivals slumped 21 percent year-on-year .

In eastern Europe, the Romanian leu touched a new six-month low against the euro as Romania remains without a government more than two weeks after general elections .

For GRAPHIC on emerging market FX performance 2016, see tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2016, see tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Editing by Keith Weir)

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