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EMERGING MARKETS-Latam currencies, stocks rally at start of 2018

(Adds view on U.S. dollar, updates prices) Jan 2 (Reuters) - Latin American currencies firmed sharply on Tuesday as the dollar broadly retreated on bets for a slower pace of U.S. interest rate hikes while solid economic growth data in China bode well for the region's raw materials exports. A key dollar index hit a 3-1/2-month low, weighed by expectations of a slower pace of interest rate increases by the Federal Reserve amid a tepid U.S. inflation picture. Fewer U.S. rate hikes than expected could help support demand for higher-yielding emerging market assets, which are seen as riskier than dollar bonds. Mexico's peso gained more than 1 percent. Investors are betting that Mexico's central bank could raise borrowing costs again in February after hiking last month, according to yields on Mexican interest rate swaps. Mexico's peso tumbled to its weakest in about 10 months in December, hurt by concerns that talks between Mexico, the United States and Canada could fail to broker a new free trade agreement. Banco Base said in a note on Monday the peso would be vulnerable to more losses ahead on free-trade jitters and could sink past 20 per dollar in the coming weeks. Also on Tuesday, a key factory index in China rose to a four-month high in December, confounding forecasts for a decline, and backing bets on resilience for the world's largest consumer of commodities, which are key exports of Latin American countries. Currencies from Brazil and Colombia strengthened close to 2 percent. Stock indexes were up throughout the region, with Brazil's benchmark Bovespa leading gains as traders unwound bets on a credit downgrade. Brazilian policymakers met in December with rating agencies to stave off a downgrade after lawmakers delayed a key vote on a plan to streamline the social security system and curb government spending. "The market sought protection from what looked like an imminent sovereign downgrade, but that did not materialize," H.Commcor brokerage trader Cleber Alessie said.

Key Latin American stock indexes and currencies at 2120 GMT:

Stock indexes daily % YTD % Latest change change MSCI Emerging Markets 1177.98 1.76 1.69 MSCI LatAm 2909.76 2.89 2.89 Brazil Bovespa 77891.04 1.95 1.95 Mexico IPC 50033.95 1.38 1.38 Chile IPSA 5618.91 0.98 0.98 Chile IGPA 28220.56 0.86 0.86 Argentina MerVal 31084.42 3.39 3.39 Colombia IGBC 11528.66 0.44 1.39 Venezuela IBC 1265.26 0.17 -96.01 Currencies daily % YTD % change change

Latest

Brazil real 3.2588 1.67 1.67 Mexico peso 19.4850 1.10 1.10 Chile peso 606.5 1.34 1.34 Colombia peso 2927 1.88 1.88 Peru sol 3.237 0.00 0.00 Argentina peso (interbank) 18.3900 1.41 1.14 Argentina peso (parallel) 19.2 0.42 0.16

(Reporting by Bruno Federowski in Sao Paulo and Michael O'Boyle in Mexico City; Editing by Susan Thomas)