EMERGING MARKETS-EM currencies climb to near two-month high in holiday-thinned trade

By Niket Nishant

Dec 24 (Reuters) - Emerging market currencies rose to a near two-month high on Wednesday as a subdued U.S. dollar and local policy cues supported sentiment, with lighter holiday liquidity amplifying moves.

Regional currencies have been a relatively attractive option for foreign investors as expectations of interest rate cuts by the Federal Reserve grow, which typically soften the dollar and increase the appeal of higher-yielding emerging-market assets.

The MSCI index of emerging market currencies .MIEM00000CUS rose 0.4%, hitting levels not seen since late October.

"Emerging market currencies are generally ending the year on a strong footing – enjoying the benefits of lower core policy rates, a modestly weaker dollar and many offering high carry," economists at ING wrote in a note.

With most markets closed over the next two days, liquidity was expected to remain thin heading into the end of the year.

DOMESTIC POLICIES ADD NUANCE TO FED-DRIVEN RALLY

Performance across markets continued to diverge. South Korea's won KRW=KFTC hit its highest since mid-November, after Reuters reported that the national pension fund was taking steps to support the currency. The KOSPI .KS11 stock benchmark slipped 0.2%.

In Israel, the shekel ILS= firmed 0.1% against the dollar, while financial stocks fell.

Finance Minister Bezalel Smotrich said on Tuesday he would introduce a law to tax commercial banks 15% on "excess" profits, accusing lenders of exploiting customers in the wake of a spike in interest rates over the past few years.

The Turkish lira TRYTOM=D3 was steady after five consecutive sessions of gains. The government hiked the monthly minimum wage by 27% for 2026 — a move that some economists say could elevate inflation in the coming months.

MSCI's index of emerging market equities .MSCIEF rose 0.4% and was on track for its longest winning streak in more than a month.

While the recent optimism has largely hinged on the Fed, investors have also been encouraged by domestic factors, such as the milder-than-expected inflation data from Brazil and Mexico on Tuesday.

"Emerging markets have long been highly exposed to swings in global risk sentiment, but they are moving closer to real monetary policy independence," economists at the International Monetary Fund wrote in a column published by the Centre for Economic Policy Research.

CHINA STOCKS GAIN, VIETNAM RALLIES

Chinese equities climbed, with the Shanghai Composite index .SSEC up 0.5% and the blue-chip CSI300 index .CSI300 up 0.3%.

U.S. President Donald Trump's administration said on Tuesday it would impose tariffs on Chinese semiconductor imports over Beijing's "unreasonable" pursuit of chip industry dominance, but would delay the action until June 2027.

Vietnamese stocks .VNI also clinched a record opening high. Investors were buoyed by signs of political stability after a senior Communist Party meeting agreed on candidates for the next five-year leadership.