EMERGING MARKETS-Growth worries put stocks on track for steepest weekly drop in more than a month

By Johann M Cherian

April 4 (Reuters) - A key emerging markets stocks index slipped on Friday and was set for its biggest weekly drop in more than a month, as investors priced in an increasing probability of a global recession triggered by U.S. President Donald Trump's assault on free trade.

MSCI's index tracking equities in developing markets .MSCIEF declined 0.6% and was on track for its steepest weekly drop since late February.

Bank shares saw the sharpest declines from Japan to Europe and in premarket trading on Wall Street. Markets will be watching closely for a crucial jobs report in the U.S. and remarks from Federal Reserve Jerome Powell. MKTS/GLOB

A currencies gauge .MIEM00000CUS, meanwhile, edged up 0.2% against a weaker dollar and was set for its biggest weekly gain since early March. Markets shunned the greenback on expectations that Trump's attempt to balance his country's trade books would also hurt the U.S. economy.

Investors are worried that weaker currencies of developing economies could also weigh on sovereign credit with growing spreads between emerging market dollar-debt and U.S. Treasuries, increasing the risk of default. However, analysts also said that a weaker dollar, in some ways, could soften the risk.

"Big picture wise, there are two things that we should take into account: one is that the stimulus could just keep coming in Europe and China and that would at least boost growth prospects later this year," said Jakob Ekholdt Christensen, senior EM strategist at BankInvest.

"Secondly, the weakening of the U.S. dollar makes it easier for countries to service their dollar debt and can increase the demand for commodities in the rest of the world."

Key resources for developing economies such as crude oil and copper were also on track for weekly declines. O/R MET/L

Stocks in central and eastern Europe .MIME00000PUS slid 4.6% and were on track for the biggest one-week drop since September 2023, with those in the Czech Republic .PX and Hungary .BUX falling 3.6% and 2.5%, respectively.

Hungary's forint EURHUF= weakened 0.9% against the euro, while Poland's zloty EURPLN= dipped 0.7% also aided by a policymakers' comments that signalled that the central bank could lower interest rates by 50-100 basis points this year.

Equity indexes of Asian economies, such as Thailand .SETI, Vietnam .VNI and South Korea .KS11, countries that have seen the steepest U.S. duties, continued to slide.

However, their currencies were marginally higher, with the Korean won .KRW appreciating 0.5% and supported by reduced political risk following a key court ruling.

Indian stocks .BSESN, .NSEI dropped more than 1.5% each, with export-focused drugmakers .NIPHARM sinking 4% after a report said Trump had threatened tariffs on the sector globally.

U.S. reciprocal tariffs, analysts say, could dampen India's economic growth by 20-40 basis points and could spur the central bank to lower interest rates at a faster pace this year.

Stocks in Sri Lanka .CSE lost 1.6% to touch levels not seen since December, while dollar bonds XS2966242336=TE dipped 0.4 cents on the dollar.

In anticipation of Trump's move, foreign investors withdrew a net $43.73 billion from Asian equities in the quarter to March, according to data compiled by LSEG.

Meanwhile, South Africa's rand ZAR= declined 1.5% and was set for its largest weekly drop since November, while local stocks .JALSH fell 2%.

Investors were navigating both the impact of U.S. tariffs on the economy and any signs of upset within the ruling coalition following the passage of a highly contentious budget bill.