* South African central bank holds rate as expected

* MSCI emerging market currency index slips to two-week low

* Developing world stocks hit lowest level so far in 2021 (Adds South Africa c.bank decision)

By Sagarika Jaisinghani

March 25 (Reuters) – South Africa’s rand pared early gains on Thursday after the central bank kept interest rates unchanged, while a stronger dollar put an index of emerging market currencies on track for its longest losing streak this year.

The rand was up 0.2% as the South African Reserve Bank (SARB) kept its key lending rate unchanged at 3.5%, as widely expected, with governor Lesetja Kganyago saying inflation was expected to be well contained in 2021.

The high-yielding currency, which has also come under pressure this month from rising U.S. bond yields, was up about 0.5% before the rate decision.

Focus turns to Mexico’s central bank policy outcome later in the day, with signs of quickening inflation raising expectations that the bank will hold interest rates. The Mexican peso was up about 0.3%.

Earlier, the Philippine central bank kept key interest rates steady, balancing the need to support an economy facing renewed challenges from fresh coronavirus curbs with concerns about rising inflation. The peso was flat.

The MSCI index of developing world currencies fell about 0.3% to a two-week low as expectations of stronger U.S. economic growth, rising U.S. bond yields and new COVID-19 lockdowns in Europe lifted the dollar.

“A stronger dollar will dampen demand for emerging markets commodities and make their dollar-denominated debt challenging to service, especially with rising longer-term interest rates,” said Hussein Sayed, chief market strategist at FXTM.

“So far, this risk seems insignificant but another sharp spike in yields and the dollar will increase the probability of a sovereign debt crisis in the EM world.”

The Turkish lira eased about 0.6%, barely budging after the central bank published its weekly data on foreign exchange reserves as it covered the week before the plunge in the currency caused by the shock ouster of the central bank chief.

The currency fell 7.5% on Monday after President Tayyip Erdogan replaced Naci Agbal with a critic of high interest rates, sparking fears of a reversal of rate hikes that had revived the currency amid Turkey’s depleted forex reserves.

The Russian rouble rebounded 0.8% after hitting its lowest so far this year on Wednesday on fears of new U.S. sanctions.

A basket of emerging market stocks slid to its lowest level this year, with Chinese and Hong Kong equities slipping as the U.S. securities regulator moved to impose measures that could de-list some Chinese firms from U.S. exchanges. For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

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(Reporting by Sagarika Jaisinghani and Sruthi Shankar in Bengaluru; Editing by Kim Coghill and Emelia Sithole-Matarise)

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