EMERGING MARKETS-Currencies stretch declines as strong U.S. manufacturing spurs dollar
* MSCI EMFX index hits lowest level in almost two years * Brazil posts strong GDP, real still lower * Chileans gear up to vote new constitution on Sunday (Adds comments, updates prices throughout) By Susan Mathew and Shreyashi Sanyal Sept 1 (Reuters) - Emerging market currencies deepened losses on Thursday as better-than-than expected U.S. manufacturing data bolstered the dollar, which is already benefiting from bets of more aggressive monetary policy tightening by the Federal Reserve this month. After logging their third straight month in the red on Wednesday, MSCI's index of EM currencies slipped 0.5% on Thursday, hitting its lowest in nearly two years. Despite the Fed's tightening, U.S. manufacturing grew steadily in August as employment and new orders rebounded, data showed. As traders bet that the Fed will deliver its third 75 basis points hike of the year in September, the dollar has stayed buoyant. "An environment of tighter global liquidity for longer will be a testing one for emerging market assets," said Alejo Czerwonko, chief investment officer EM Americas at UBS Global Wealth Management. "Most countries are up for the challenge, though ... Colombia, Chile, South Africa, and to a lesser extent the Philippines and Thailand exhibit some vulnerabilities." Brazil's real, which rose earlier in the session after data showed economic growth rose more than expected in the second quarter, reversed gains to fall nearly 1%as the dollar gained momentum. The pace of growth in Brazil will be difficult to sustain in the coming quarter as higher domestic interest rates will weigh on output, said Jared Lou, portfolio manager, EM debt at William Blair Investment Management. "Additionally, debt-to-GDP ratios near 78% and inflation over 10% in July limit policy flexibility." Chile's peso was flat after falling 1% earlier in the session as the price of copper - the country's biggest export revenue item - slipped amid worries about China demand. Data on Thursday showed the rate of growth in Chile's economic activity slowed in July from June. Still Chile's central bank is seen hiking by 75 basis points this month to rein in inflation. Investors also looked ahead at Chileans voting on a new constitution over the weekend, with support dwindling in recent weeks for the new document and polls showing voters are more likely to reject the new text. "Even if the constitution is rejected, it is clear that Chile is moving towards a larger role for the state in the economy. That's likely to entail larger budget deficits and a rising public debt ratio," said Kimberley Sperrfechter, assistant emerging markets economist at Capital Economics. In Mexico, the peso fell 0.2%. A central bank poll showed private sector analysts see the peso ending the year at 20.70, stronger than an earlier forecast of 20.82, but weaker than the 20.22 it is currently trading at. Mexico's central bank on Wednesday said it is not wed to hiking interest rates in line with the Fed. The Mexican monetary authority had raised its key interest rate by 75 basis points in August. Key Latin American stock indexes and currencies at 1853 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 974.74 -1.95 MSCI LatAm 2118.87 -0.35 Brazil Bovespa 110023.13 0.46 Mexico IPC 45471.09 1.23 Chile IPSA 5409.30 -0.58 Argentina MerVal 137191.30 0.698 Colombia COLCAP 1224.21 -0.34 Currencies Latest Daily % change Brazil real 5.2296 -0.57 Mexico peso 20.1840 -0.24 Chile peso 895.9 0.07 Colombia peso 4480.95 -1.29 Peru sol 3.8625 -0.30 Argentina peso (interbank) 139.0200 -0.21 Argentina peso (parallel) 281 3.20 (Reporting by Susan Mathew and Shreyashi Sanyal in Bengaluru; editing by Jonathan Oatis)