Dollar strength amid risk aversion weighs on currencies

Dollar strength amid risk aversion weighs on currencies

* Israel's shekel falls 0.6% despite interest rate hike

* Pakistan's central bank keeps policy rate unchanged

* Colombian peso slides as oil drops 4%

By Susan Mathew

Aug 22 (Reuters) - Emerging market currencies deepened losses on Monday as the dollar gained momentum, with Brazil's real extending losses to a sixth straight session, while Israel's shekel fell despite an interest rate hike by the local central bank.

Risk aversion amid inflation and recession fears rose on Monday following Russia's announcement of a three-day halt to European gas supplies via the Nord Stream 1 pipeline at the end of this month, as well as calls for faster monetary policy tightening by members of the Federal Reserve.

"A combination of weaker global demand, high inflation and rising interest rates is set to weigh on EM outlook over the coming months," Capital Economics said in a note.

Investors will look to the U.S. central bank's stance after it hiked rates by 225 basis points since March. The dollar marched ahead, with a weakening euro aiding its gains.

Israel's shekel ILS= fell 0.6% to near two-week lows after the central bank hiked its key rate by 75 basis points to 2%, to rein in inflation that has topped 5%.

"We think the (central bank) sees the need for testing rates in or above this range in the coming months, based on the current outlook," strategists at Citigroup said.

"However, this more aggressive path also raises the prospect of a more sudden stop or even reversal in the policy rate path, should the data warrant it."

Pakistan's central bank, meanwhile, held its main policy rate at 15%, as expected, adding that it would closely watch inflation data and global commodity prices. The central bank hiked rates by 125 basis points in July.

Mexico's peso MXN= was flat, while Brazil's real BRBY fell 0.1%, with investors awaiting August inflation figures due on Wednesday. The figure is expected to cool from a year ago, according to Refinitiv data.

Crude exporter Colombia's peso COP= slipped 0.4% with oil prices sliding 4%.

Colombia lowered its economic growth projection for next year to 2.2%, down from a previous 3.2%, Finance Minister Jose Antonio Ocampo said on Friday, adding that he does not think the country will regain its investment grade soon.

The Argentine peso ARS= fell 0.4% despite tight controls.

Argentina's government on Sunday appointed a well-known economist and vocal critic of the policies of Cristina Fernandez de Kirchner, the current vice president and former president, to effectively be the second in command of the key economy ministry.

Key Latin American stock indexes and currencies at 1516 GMT: Stock indexes

Latest

Daily %

change MSCI Emerging Markets

991.19

-1.03 .MSCIEF

MSCI LatAm

2173.84

-0.08 .MILA00000PUS

Brazil Bovespa

110297.87

-1.07 .BVSP

Mexico IPC

48403.51

-0.12 .MXX

Chile IPSA

5334.56

0.79 .SPIPSA

Argentina MerVal

131086.44

0.059 .MERV

Colombia COLCAP

1297.03

-0.82 .COLCAP

Currencies

Latest

Daily %

change Brazil real

5.1734

-0.11 BRBY

Mexico peso

20.1638

-0.07 MXN=D2

Chile peso

947.5

-0.43 CLP=CL

Colombia peso COP=

4386

-0.37 Peru sol

3.8781

-0.69 PEN=PE

Argentina peso

136.7200

-0.40 (interbank) ARS=RASL


Reporting by Susan Mathew in Bengaluru; Editing by Paul Simao