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Lira, rupee at forefront as Syria tension pounds emerging assets

By Sujata Rao

LONDON (Reuters) - Emerging stocks, bonds and currencies took another hammering on Wednesday as mounting expectations of Western action against Syria pushed up oil prices and drove investors to seek shelter in dollar assets.

The United States and its allies appeared to be gearing up for a military strike against Syria, perhaps within days, as punishment for last week's chemical weapons attacks which they have blamed on President Bashar al-Assad's government.

The Turkish lira and the Indian rupee - already under heavy pressure due to their large current account deficits and an imminent rollback in U.S. money printing - were at the forefront of selling, with both hitting new record lows as oil prices surged to six-month highs above $117 a barrel.

The higher cost of oil will make it even more difficult for the two energy importers to contain their current account gaps.

"Syria is raising the level of uncertainty and those closest to Syria such as Turkey will be on the receiving end of the selling," said Ashok Shah, CIO of asset manager London & Capital. "It's another round of bad news."

"In (energy-importing) countries such as India, if you look at the oil price in rupees you can see how they are getting impacted - it's a double whammy for them."

The rupee tumbled 3.6 percent to 68.80 per dollar, its biggest one-day fall in 18 years, bringing 2013 losses to 20 percent. The lira fell 1.6 percent, while Turkish credit default swaps inched to new 14-month peaks.

The Syrian crisis has aggravated a selloff in emerging market assets that was triggered by expectations the U.S. Federal Reserve will start scaling back its massive stimulus program, as soon as next month.

U.S. stimulus had flooded developing economies with cheap cash and concerns those flows may now reverse are especially hitting the currencies of countries with large funding gaps - India, Turkey, Brazil, South Africa and Indonesia.

As the Middle East prepared for the impact of a strike on Syria, stock markets in the region plunged and the Israeli shekel extended losses, easing to a near three-month versus the dollar.

One of the best-performing emerging currencies this year, the shekel has shed almost half its 2013 gains on concerns that U.S.-led action in Syria may lead to wider conflict in the area.

Emerging currencies are so far shrugging off central banks' efforts to stem the rot and in Turkey investors have taken the central bank's refusal to aggressively raise rates as a green light to sell the lira.

"The lira is just going one way unless the (central bank) reveals its hand more clearly - it needs a bit ticket interventionist plan," Standard Bank analyst Tim Ash said.

Brazil's real has eased off five-year lows and rose 0.8 percent due to a $60 billion currency intervention plan and expectations of a half point rate rise later on Wednesday - the fourth in a row.

Investors are now waiting to see what Indonesia's central bank does at an extraordinary meeting it has called for Thursday. Markets reckon a rate rise is in the cards to lift the rupiah off four-year lows.

Bond yields have risen across the board.

OUTFLOWS

Losses on emerging currencies come as investors stampede to exit emerging stocks and bonds, raising concerns of a vicious circle that will induce more investors to sell out.

Dubai's <.DFMGI> stock market dived 7.5 percent at one point, after a 7 percent slide on Tuesday, although it later recovered.

Early on Wednesday, stocks in the Philippines <.PSI> tumbled 6 percent, while Indonesian and Thai bourses fell 2.5-3 percent <.JKSE> <.SETI> in tandem with a fierce currency selloff.

Foreign investors sold $1 billion of Indian shares in the eight sessions through Tuesday while dumping almost $3 billion in debt over 13 successive sessions. Indonesia has seen equity outflows of $1.3 billion in the past seven sessions.

"Some emerging markets were overbought and they needed a selloff to bring them to more reasonable levels," said Julian Mayo a portfolio manager at Charlemagne Capital. "But at the moment, sentiment seems to have taken over from fundamentals."

Latin American stocks fared slightly better however, with Mexico <.MXX> and Brazil <.BVSP> up 0.2 percent.

Eastern European currencies, so far resilient to the emerging markets malaise, thanks to a recovering euro zone and relatively small funding needs, also saw selling due to dovish signals from policymakers.

The Polish zloty fell 1 percent to five-week lows after the finance minister called for more rate cuts. The Hungarian forint was flat following the previous session's 1 percent fall that was caused by a 20 bps rate cut.

"Such policy steps look increasingly inappropriate in a market where investors require higher risk premiums," analysts at BNP Paribas said.

(Editing by Jeremy Gaunt)

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