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EMERGING MARKETS-Brazilian real hits 2-week low, Chilean peso slips before rate move

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* Real at lowest since May 25 * Chile central bank seen hiking rates to 9% -poll * Brazil proposes compensating states to enable tax cut (Updates prices, details; Adds comment) By Shreyashi Sanyal June 7 (Reuters) - Brazil's real fell over 1% to its lowest in over two weeks on Tuesday, underperforming its Latin American currencies on worries about its fiscal health, while Chile's peso dropped on lower copper prices ahead of an expected interest rate hike. The real fell to 4.87 per dollar after the Brazilian government proposed a constitutional amendment to compensate states for an eventual loss in revenue caused by a tax cut aimed at curbing soaring diesel and gas prices. This would temporarily reduce the state tax on the circulation of goods and services (ICMS) to zero, but the proposal has yet to be approved by Congress. "Yes, it will have a disinflationary impact, but only if the measures are sustained to the point that when the tax is reimposed, diesel prices and/or headline inflation have fallen enough," said Simon Harvey, head of FX analysis at Monex Europe. "There are undoubtedly concerns over the impact this will have on Brazil's fiscal position, while the longevity of the proposal can also be called into question given the upcoming election." Brazil's spending cap was approved by Congress in 2016, amending the constitution to limit the growth of the federal budget to the pace of inflation. The rule is considered the principal anchor of fiscal policy. President Jair Bolsonaro has created exceptions to make room for more public expenditures this year and is looking to change spending rules after October's election. Leftist frontrunner Luiz Inacio Lula da Silva has called repeatedly to scrap the spending cap. Chile's peso fell 0.5% as prices of its top export, copper, dropped on concerns about lower demand from China. Data showed Chilean exports of the red metal reached $3.76 billion in May, down 18.3% from a year earlier. The country's central bank was expected to hike its benchmark interest rate to 9% later on Tuesday to tame rising inflation. "We think the central bank will likely increase the reference rate by 100bps to 9.25% in today's monetary policy decision," wrote Credit Suisse analysts Alonso Cervera and Alberto Rojas, highlighting rising inflation in Chile and across the world. The sol currency of world No. 2 copper producer Peru fell 0.1%. Most emerging market stocks and currencies trailed lower on Tuesday as a larger-than-expected interest rate hike by the Reserve Bank of Australia sparked worries of tighter monetary policy, lifting safer bets like the U.S. dollar and Treasuries, while taking the shine off riskier assets. Mexico's peso and the Colombian peso erased early losses and edged up against the dollar. The MSCI's index for Latin American stocks fell 1.1%. Key Latin American stock indexes and currencies at 1930 GMT: Stock indexes Latest Daily % change MSCI Emerging 1061.90 -0.88 Markets MSCI LatAm 2389.09 -1.06 Brazil Bovespa 110286.65 0.09 Mexico IPC 49992.11 -0.16 Chile IPSA 5343.99 0.21 Argentina MerVal 90726.52 0.415 Colombia COLCAP 1574.87 -2.07 Currencies Latest Daily % change Brazil real 4.8702 -1.54 Mexico peso 19.5717 -0.06 Chile peso 827.4 -0.60 Colombia peso 3777.6 0.16 Peru sol 3.685 1.12 Argentina peso 121.2700 -0.13 (interbank) Argentina peso 203 0.99 (parallel) (Reporting by Shreyashi Sanyal and Bansari Mayur Kamdar in Bengaluru; Editing by Mark Potter and Mark Heinrich)