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EMERGING MARKETS-EM FX, stocks set for weekly losses as U.S. growth optimism powers dollar

* Turkish lira set for worst week since 2018

* Russian rouble bounces in absence of new U.S. sanctions

* South Africa’s rand recovers from two-week low

* EM stocks funds lead 2021 declines - Lipper data

March 26 (Reuters) - Emerging market currencies and stocks were set to close out one of their worst weeks this year on Friday, as growing confidence in a strong U.S. economic recovery and rising bond yields lifted the dollar.

The Turkish lira eased to 7.9980 against the dollar after crashing 10% in its worst week since 2018, as President Tayyip Erdogan replaced a hawkish central bank chief with a critic of high interest rates.

The lira has been one of the worst performing emerging market currencies this year, behind only the Argentine peso and the Brazilian real, as concerns about Turkey’s falling forex reserves and high inflation levels erased gains from a series of interest-rate hikes since November.

Still, the Institute of International Finance kept its estimate of the lira “fair value” exchange rate at 7.50 per dollar on Thursday, saying “the sharp tightening in financial conditions that is unfolding now make a contraction in GDP very likely.”

The MSCI index of emerging market currencies rose 0.1% after logging its longest losing streak this year in the previous session, as a recent jump in U.S. bond yields dented the appeal of high-yielding currencies such as the South African rand.

Emerging market stocks rebounded about 1.5% after hitting their lowest level this year on Thursday, but were still set for their second straight weekly decline, partly hit by volatility due to quarter-end rebalancing by institutional investors.

Mutual funds and exchange-traded funds that invest in emerging stock markets are now this year’s biggest investment decliners, according to Refinitiv Lipper data, with funds that invest in Colombia, Argentina and Brazilian equities slumping more than 10% on average.

Investors’ focus on Friday will be on a central bank policy meeting in Colombia, with the bank expected to leave the benchmark interest rate unchanged as inflation remains well below target. The Colombian peso eased about 0.5% on Thursday, tracking its third straight month of declines.

The Russian rouble firmed past 76 versus the dollar, heading away from 2021 lows touched two days ago, while South Africa’s rand rose 0.2%, a day after the central bank kept lending rates unchanged.

“The (rand) has clawed back some lost ground in the overnight session and, as the week draws to a close, it will be an important marker to watch, setting the tone for the coming week,” said Citadel Global executive director Paul Muller.

For GRAPHIC on emerging market FX performance in 2021, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see tmsnrt.rs/2OusNdX

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For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see

Reporting by Sagarika Jaisinghani in Bengaluru, additional reporting by Olivia Kumwenda-Mtambo in Johannesburg; editing by Uttaresh.V

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