LONDON, Feb 14 (Reuters) - Emerging stocks extended their rally for a third day and a weaker dollar lifted currencies ahead of a key U.S. inflation report on Wednesday while South Africa investors were poised for the next twist in the saga over President Jacob Zuma's future.
MSCI's emerging market benchmark jumped around one percent its best daily advance in three weeks - pulled higher by stellar gains in Asia.
Heavyweight bourse Hong Kong jumped 2.3 percent in thin pre-lunar new year trade while South Korean stocks added more than 1 percent, both sailing higher thanks to gains in tech and health stocks. Indexes in emerging Europe , Russia and Turkey all rose.
But investors were wary ahead of U.S. consumer prices for January due out later in the day, after the prospect of accelerating inflation in the world's top economy ignited the recent sell-off that ripped through equity and bond markets around the globe.
According to a Reuters poll, U.S. consumer prices are expected to slow to annual 1.9 percent and core inflation to 1.7 percent, though an upside surprise could inflame expectations for faster interest rate increases from the Federal Reserve, pushing up global borrowing costs in turn.
"It's super critical for emerging markets," said Jakob Christensen, head of EM research at Danske Bank, adding both Turkey and South Africa looked vulnerable to a faster-than-expected tightening cycle by the Fed.
"Further inflation signs would raise speculation of four hikes as you have a very expansionary policy in play in the U.S. and the Fed has to think hard about what will be the growth impact of all this and the inflation impact."
The Bank of America Merrill Lynch fund manager survey released on Tuesday found a record one-month jump in the number of investors taking out protection against a sharp drop in equity markets in the next three months.
The dollar index came under pressure for a third straight day, giving a fillip to emerging currencies such as the Turkish lira, Russian rouble and Mexican peso .
In South Africa, investors were awaiting the latest twist in the saga surrounding the departure of President Jacob Zuma, who has been ordered by the ruling ANC to quit as head of state.
In a dramatic escalation of the pressure on Zuma, heavily armed police raided the luxury home of the Gupta family on Wednesday as part of a probe into allegations the three brothers had corrupt links with the president.
South Africa's rand outperformed wider emerging currencies, strengthening nearly one percent against the dollar to trade at its best level in two weeks. The main equity index gained 0.3 percent while yields in both dollar-bonds and the local sovereign benchmark edged lower.
Markets are hoping for a swift departure of the embattled president, paving the way for ANC leader Cyril Ramaphosa to implement economic reforms much needed in the continent's most industrialised economy.
"The fact they are raiding the Guptas' residence is a sign the genie is out of the bottle and it's the point of no return, it's a matter of time," said Danske Bank's Christensen.
"This is good for South African growth and its structural problems it may mean volatility but they are addressing fundamental problems that have been lingering for many years."
For GRAPHIC on emerging market FX performance 2018, see http://tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2018, see http://tmsnrt.rs/2dZbdP5
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(Reporting and graphic by Karin Strohecker, additional reporting by Claire Milhench, Editing by William Maclean)