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EMERGING MARKETS-Latam FX rallies as dollar plunges after Fed hike

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* Brazil central bank policy decision eyed * Fed hikes interest rates by 50 basis points * Brazilian oil firm Petrobras boosts stocks (Recasts lead, adds details, comments; updates prices throughout) By Shreyashi Sanyal and Susan Mathew May 4 (Reuters) - Currencies in Latin America strengthened on Wednesday as the dollar dropped following an expected half a percentage point interest rate hike by the U.S. Federal Reserve, while Brazilian markets awaited a policy decision later in the day. The real rose 1%, reversing declines of 1.6% earlier in the day, while Mexico's peso added 1.1% against the greenback. Risk sentiment was hit earlier on Wednesday as the European Union proposed an oil embargo among other measures in its toughest sanctions yet against Russia over its invasion of Ukraine. Investors also eyed more news from China, where Beijing shut scores of metro stations and bus routes and extended COVID-19 curbs on many public venues on Wednesday, while Shanghai remains in full-lockdown, painting a bleak picture of economics growth and demand from China. A sharp reversal in selling pressure occurred by the afternoon as the Fed stuck to its plan of raising its benchmark overnight interest rate by 50 basis points, putting to rest any whispers of a 75 basis points increase. The widely expected move by the U.S. central bank took the shine off a recently rallying dollar. "Chairman (Jerome) Powell indicated that a series of 50-basis point hikes are likely at upcoming meetings, but a 75-basis point hike was not something that the committee was entertaining currently," said Charlie Ripley, senior investment strategist at Allianz Investment Management. "Overall, market participants and the Fed appear to agree on the destination they are heading with regards to monetary policy, but how they get there seems to be evolving at each meeting." Brazil's central bank is also seen increasing the key rate by 100 basis points to 12.75%. The monetary authority has raised its key rate by 100 bps or 150 bps at each of its past six meetings to tame runaway inflation and the market expects another hike in June, but by 50 bps before it can end the cycle. "We would prefer a more data-dependent approach and less forward guidance, particularly when there are large uncertainties regarding the current inflationary process in the country and the trajectory of monetary policy in the U.S. and its effects on emerging market currencies," said analysts at Credit Suisse. But the release of Brazil's economics indicators have been a challenge because of a staff strike at the central bank. This will not affect the release of the monetary policy decision, the bank said. Brazil's central bank move would follow a surprise 40 bps hike in India on Wednesday that sent local bond yields rising. Brazil stocks rose 0.9%, boosted by a 4.7% rise in oil firm Petrobras. Meatpacker Marfrig Global Foods lost 8.3% after it reported a 61% drop in net profit for the first quarter. Key Latin American stock indexes and currencies at 1942 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1068.60 -0.06 MSCI LatAm 2344.70 2.95 Brazil Bovespa 107498.96 0.91 Mexico IPC 51487.55 0.82 Chile IPSA 4896.69 2.32 Argentina MerVal 89421.83 -0.183 Colombia COLCAP 1604.87 0.72 Currencies Latest Daily % change Brazil real 4.9063 1.17 Mexico peso 20.0291 1.24 Chile peso 854 0.16 Colombia peso 4061.2 -0.94 Peru sol 3.765 1.35 Argentina peso (interbank) 116.0100 -0.11 Argentina peso (parallel) 198 -100.00 (Reporting by Susan Mathew and Shreyashi Sanyal in Bengaluru; editing by Barbara Lewis and Sandra Maler)