EMERGING MARKETS-Dollar inflicts second day of losses on emerging markets

By Claire Milhench

LONDON, Feb 8 (Reuters) - Dollar strength and European political risks kept emerging markets under pressure on Wednesday, with equities slipping for a second straight day and China's yuan touching a three-week low.

Investors have fled in recent days to safety of dollar and yen, spooked by France's presidential election campaign where far-right National Front Leader Marine Le Pen (Other OTC: PENC - news) has pledged to take France out of the European Union.

With (Other OTC: WWTH - news) the dollar index firming 0.3 percent, emerging currencies struggled to make headway, whilst MSCI (Frankfurt: 3HM.F - news) 's emerging stocks index slipped to five-day lows.

While shares in Shanghai and Hong Kong climbed around 0.5 percent, European markets weakened, led by Russia and South Africa with losses of around 0.6 percent as commodity prices slipped.

Manik Narain, an emerging FX strategist at UBS (LSE: 0QNR.L - news) said that after a strong emerging markets rally, risks both within the sector and globally looked underpriced.

"Europe has definitely been a dynamic that's gaining traction - you've seen some widening of peripheral spreads reflecting political worries ... and that could fester for a while," Narain said.

Some of those fears relate to China, where the yuan touched a three-week low of 6.8916, before recovering to end slightly firmer. It remains under pressure from the dollar as well as showing China's foreign exchange reserves had fallen below the closely-watched $3 trillion level in January for the first time in nearly six years.

VTB Capital analysts noted the yuan had been relatively firm this year and predicted interest rates would move up in coming months after last week's surprise 10 bps rate rise.

"The authorities are also conscious of bubble risks in the financial markets and it might be that they are willing to trade off some reduction in economic growth for this year in return for greater financial stability," VTB added.

Investors are also watching South Africa where the slipped 0.25 percent against the dollar before President Jacob Zuma's state-of-the union address on Thursday amid speculation of an imminent cabinet reshuffle.

Zuma has downplayed the reports

Citi analysts said they had recently cut their long rand positions despite fundamental economic improvements, including a shrinking trade deficit.

"We still think the rand has fundamental backing and that periods without political noise could see the unit grind stronger," Citi said. They however that the state-of-the nation speech seemed like "a potential platform for President Zuma to stamp his authority".

Johannesburg stocks fell 0.5 percent, dragged down by a 4 percent slump in mobile phone operator MTN which expects to post full-year losses after a $1 billion fine in Nigeria.

The Turkish lira also slipped after weakening 1.6 percent on Tuesday. Industrial output grew 1.3 percent year-on-year in December, underscoring the weak state of the economy.

India's rupee was slightly weaker and shares extended losses, down 0.4 percent, after the central bank kept rates on hold at 6.25 percent.

The Polish zloty weakened 0.2 percent against the euro before a central bank meeting which should keep rates at a record low of 1.5 percent.

Romania's leu touched new four-month highs against the euro, after hitting seven-months low last week amid mass anti-government protests. The central bank left its benchmark interest rate on hold at a record low of 1.75 percent on Tuesday.

For GRAPHIC on emerging market FX performance 2016, see http://tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2016, see http://tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley (Xetra: 885836 - news) Emrg Mkt Indx 918.99 -0.81 -0.09 +6.58

Czech Rep 954.02 +6.77 +0.71 +3.52

Poland 2081.43 -5.11 -0.24 +6.85

Hungary 32580.44 +40.91 +0.13 +1.80

Romania 7624.46 -4.67 -0.06 +7.61

Greece 613.88 -9.49 -1.52 -4.62

Russia 1169.46 -9.75 -0.83 +1.49

South Africa 45135.49 -231.39 -0.51 +2.81

Turkey 87581.86 +105.13 +0.12 +12.09

China 3167.45 +14.36 +0.46 +2.06

India 28236.00 -99.16 -0.35 +6.04

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2017

Czech Rep 27.02 27.00 -0.06 -0.04

Poland 4.31 4.30 -0.18 +2.15

Hungary 309.22 308.91 -0.10 -0.13

Romania 4.49 4.49 -0.06 +1.05

Serbia 123.69 123.80 +0.09 -0.27

Russia 59.51 59.42 -0.15 +2.95

Kazakhstan 324.95 323.58 -0.42 +2.68

Ukraine 26.91 26.98 +0.26 +0.33

South Africa 13.47 13.45 -0.16 +1.92

Kenya 103.70 103.60 -0.10 -1.28

Israel 3.76 3.75 -0.23 +2.50

Turkey 3.75 3.74 -0.07 -5.87

China 6.87 6.88 +0.13 +1.01

India 67.33 67.33 -0.00 +0.91

Brazil 3.12 3.12 +0.00 +4.27

Mexico 20.61 20.62 +0.05 +0.52

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 345 1 .00 7 56.17 1

(Additional reporting by Sujata Rao; Editing by Tom Heneghan)