EMERGING MARKETS WEEK-Wary eye on inflation and central banks

By Daniel Bases

NEW YORK, April 20 (Reuters) - Rising food and fuel prices in emerging market economies are putting a strain on many social and monetary systems and will continue to test the budding optimism that the worst of the credit crunch is over.

That optimism is based on actions taken by the Federal Reserve to support the U.S. financial system with ample amounts of cash for borrowing and aggressive accounting for bad loans on bank balance sheets.

Investors have looked to the rally in developed markets, and driven emerging market stocks up 1.37 percent .MSCIEF last week while narrowing the yield spread between EM sovereign bonds and U.S. Treasuries by 22.8 basis points to 264 11EMJ.

On April 24, minutes from Brazil's monetary policy committee, known as Copom, will be released, giving investors greater insight into why the Selic rate was raised 50 basis points to 11.75 percent. The move on April 16 was more than expected and lifted the borrowing rate for the first time in three years.

The minutes "will either confirm what the market is interpreting, which is a relatively short (interest-rate) cycle or not. If it doesn't, it will add to the growing volatility in Brazilian rates," said Eduardo Levy-Yeyati, head of Latin American strategy and economic research at Barclays Capital in New York.

"So far the market is taking it very quietly, in a sense. I think the market interpreted this statement as saying it was going to be front-loaded but short, maybe 150-200 basis points at the most," Levy-Yeyati said.

Brazil's markets are closed on Monday for a holiday, limiting trading activity in the region.

Paraguay's citizens are voting in a general election on Sunday to elect a new president, with ex-Roman Catholic bishop Fernando Lugo seeking to unseat the Colorado Party after more than 60 years of one-party rule. (For story, click on [ID:nN20329536].)