October 10, 2019 / 9:51 AM / 2 months ago

EMERGING MARKETS-EM assets tread cautiously ahead of U.S.-China trade talks

* Chinese yuan firms on trade optimism

* Turkish lira steady despite U.S. sanction threat

* Czech crown slides after weak inflation numbers

By Sruthi Shankar

Oct 10 (Reuters) - A soft dollar supported China's yuan and a swathe of emerging market currencies on Thursday after reports that Washington and Beijing may agree a partial trade deal, but investors were unsettled about the outcome of a crucial round of negotiations.

The yuan danced to the tune of clashing trade headlines, last trading up 0.2% in offshore trading after Bloomberg reported a previously agreed currency pact could be part of a deal suspending further tariff hikes. FRX/

A handful of other media reports on Thursday signalled progress in trade talks, denting the U.S. dollar and spurring a mini-rally in risk assets that took a hit from news on Wednesday that Washington had widened its trade blacklist to include some of China's top artificial intelligence startups.

Trade officials from both sides were scheduled to meet in Washington on Thursday and Friday to try to end their bruising 15-month-old trade war.

"Markets have been factoring in a good deal of probability for a positive outcome," said Jakob Christensen, head of EM research at Danske Bank.

Trade-sensitive Asian currencies such as the Korean won and Taiwanese dollar rose about 0.1%, while the Russian rouble steadied and the South African rand gained 0.3%

The Turkish lira languished near 4-month lows at 5.8806 per dollar after U.S. senators outlined possible sanctions on Turkey, including targeting the U.S. assets of President Recep Tayyip Erdogan and imposing visa restrictions.

The currency broke past a key level of support at 5.85 per dollar on Wednesday after Turkey launched a military operation targeting Kurdish fighters in northeast Syrian.

"The lira could be vulnerable here, but the immediate impact compared to what we were looking at last year, where there were talks about really tightening sanctions, hitting Turkey's ability to raise funds in international capital markets, this is more isolated to the military and the energy sectors," said Danske's Christensen.

In east Europe, the Czech crown slid against the euro after data showed inflation fell 0.6% in September, its steepest decline since September 2006, likely taking some pressure off the central bank to continue tightening monetary policy.

Developing world stocks were flat, with Chinese stocks gaining on hopes of a trade deal, while Taiwanese and Indian shares dropped about 0.8% and 1%, respectively.

Turkey's main BIST 100 index hit 1-month lows, dragged down by banks and energy companies.

For GRAPHIC on emerging market FX performance 2019, see tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance 2019, see tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see (Reporting by Sruthi Shankar in Bengaluru; Editing by Giles Elgood)

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