* Doubts over U.S. economic recovery keep dollar at 2-year low
* Improving signs of factory activity in China lifts mood
* South African rand outperforms peers in July
* Russian rouble lags for the week and month
By Shreyashi Sanyal
July 31 (Reuters) - Emerging market currencies were set for their best month this year on Friday, as the dollar was on track to record its worst month in a decade on doubts about a U.S. economic recovery, while a pick-up in Chinese factory activity aided riskier bets.
The MSCI's index for emerging market currencies gained 0.3% on Friday and was up 1.5% in July, as confidence eroded in the world's reserve currency.
The dollar fell to a two-year low a day after U.S. President Donald Trump raised the possibility of delaying the November presidential election, moments after data showed U.S. GDP contracted at the sharpest pace since the Great Depression in the second quarter.
A weaker U.S. currency and excess liquidity stemming from stimulus packages in developed markets have boosted buying interest in emerging market currencies.
South Africa's rand edged higher, outperforming its peers in July, as investors valued the rand's yield differential, or carry, keeping focus off the country's mounting fiscal fragility.
The Turkish lira edged up as a four-day holiday kicked off and thinned market liquidity. It was recently plagued with concerns of depleted FX reserves and costly state interventions to steady the currency.
Russia's rouble largely underperformed its peers for the week and the month, but analysts say a worse oil price outlook, prospect of further rate cuts and speculation of more U.S. sanctions are not the only causes for its weakness.
"The rouble's slide has not taken it outside its normal range of volatility and the move came hand-in-hand with moves in the Turkish lira and South African rand, which suggests that the ongoing correction in risk assets and stocks worldwide could be the root trigger," said Tatha Ghose, FX and emerging markets analyst at Commerzbank.
Further supporting the risk-on mood was data which showed China's factories stepped up activity in July for a fifth straight month on improving prospects for electrical and pharmaceutical goods.
Stocks in the developing world were set to clock their biggest gains since April on improving economic indicators and global stimulus steps, but caution prevailed due to surge in COVID-19 cases in hotspots including Brazil, India and Russia.
Hungary's forint was set to outperform central and eastern European units in July, with most currencies in the region firming broadly after European Union leaders struck a deal on the 750-billion euro ($889.50 billion) coronavirus recovery fund early last week.
For TOP NEWS across emerging markets
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ($1 = 0.8432 euros) (Reporting by Shreyashi Sanyal in Bengaluru; editing by Uttaresh.V)