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EMERGING MARKETS-Latam FX drops as U.S. inflation spike brews tapering fears

    * U.S. consumer prices post biggest gain in nearly 12 years
    * Brazil's services activity falls in March, first in 10
months
    * Dollar gains after four sessions of decline

    By Shashank Nayar
    May 12 (Reuters) - Most Latin American currencies fell on
Wednesday as a larger-than-expected jump in U.S. inflation
raised concerns over early policy tightening, with Brazil's real
set to snap a five-day winning streak on weak services data.
    Treasury yields rose 3 basis points to 1.65% and the dollar
strengthened after U.S. consumer prices increased more than
expected in April, leading many to believe inflationary
pressures could spur the Federal Reserve into tightening policy
earlier than signaled.
    A weak U.S. labor market has kept the Fed's stance largely
dovish. 
    "We think that most EM currencies will fall a bit further
over the rest of this year, in part because we forecast the
10-year US Treasury yield to rise above 2%," said Jonas
Goltermann, senior markets economist at Capital Economics. 
    "As a result, we expect yield differentials to generally
shift in favor of the dollar, and pressure on the currencies of
economies with weaker fiscal and external balance sheets to
increase."
    Brazil's real fell 0.3% after gaining for five
consecutive sessions, as services activity fell in March for the
first time in 10 months, meaning the sector shrank in the first
quarter of the year back to below pre-pandemic
levels.
    Furthermore, analysts believe the real's recent appreciation
to be short lived due to fiscal concerns, inflation worries and
pressure from the coronavirus pandemic.
     "In view of the still very tense COVID situation in Brazil,
it seems questionable whether the fiscal risk factors really are
ring-fenced after the budget for 2021 was passed with a spending
cap," analysts at Commerzbank wrote in a note.
    "Against the background of the slow progress with the
vaccinations the debate about further corona aid measures might
resurface next month, if not before, putting BRL under
considerable pressure."
    The yield-sensitive Mexican peso fell 0.2% even as
its industrial output rose 0.7% in March from February, the
tenth consecutive monthly increase, official data
showed.
    Commodity-focused currencies like the Colombian and Chilean
peso eased 0.4% and 0.7%, respectively, despite a
jump in oil and copper prices.
    The Peruvian sol rose 0.4% and was the only gainer
among its Latin American peers. Opinion polls showed the gap
closing between socialist front-runner Pedro Castillo and the
right-wing Keiko Fujimori ahead of June 6 presidential
elections. 
    
    Key Latin American stock indexes and currencies:
    
 Stock indexes            Latest    Daily % change
 MSCI Emerging Markets      1319.5                  -0.72
                                    
 MSCI LatAm                2503.08                  -1.08
                                    
 Brazil Bovespa           121377.7                  -1.29
                                 4  
 Mexico IPC               49425.05                  -0.46
 Chile IPSA                4530.45                  -0.23
 Argentina MerVal         -         -
                                    
 Colombia COLCAP           1285.43                  -0.52
                                    
                                                         
 Currencies               Latest    Daily % change
 Brazil real                5.2283                  -0.14
 Mexico peso               20.0181                  -0.35
 Chile peso                  707.1                  -0.71
 Colombia peso             3723.27                  -0.37
 Peru sol                   3.6908                   0.35
 Argentina peso              93.98                  -0.02
 (interbank)                        
 

 (Reporting by Shashank Nayar in Bengaluru; Editing by Nick
Macfie)
  
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