EMERGING MARKETS-Asian currencies fall the most since May as oil prices, bond rout bite

By Shruti Agarwal

Sept 24 (Reuters) - Emerging Asia currencies fell the most in more than four months on Thursday, weighed down by oil-driven inflation risks and sharply higher U.S. Treasury yields, as markets monitored the Middle East conflict and US-China talks.

MSCI's gauge of emerging market currencies .MIEM00000CUS fell 0.4%, their biggest single-day drop since mid-May.

The Iran conflict has kept emerging market currencies under pressure as elevated oil prices fanned inflation in energy-importing economies and strained the fiscal health of governments.

Oil prices climbed nearly 4% overnight after Iran's president vowed never to surrender in the face of US pressure, although they pared gains after Iran said it remained open to diplomacy. O/R

"Higher oil prices, signs of renewed US exceptionalism, and the resulting upward pressure on UST yields have started to weigh on regional currencies again," said Fiona Lim, senior FX strategist, SVP at Maybank.

She said the rise in oil prices could be a bigger consideration for policymakers in the region than the Fed or rising US Treasury yields.

Putting further strain on regional currencies, the dollar clung to a two-month high after strong manufacturing data spurred fresh bets on a Federal Reserve rate rise and a weak auction sent U.S. treasury yields higher across the curve. US/

Currencies of energy importing countries such as the Thai baht, the Philippine peso, and the Indian rupee weakened between 0.1% and 0.3%.

The Indonesian rupiah led declines in the region, weakening as much as 0.6% to 17,900 against the dollar, its lowest level since early August.

The currency has weakened around 6.8% so far this year, as fuel subsidies have piled onto long-festering concerns about policymaking, fiscal spending, and central bank independence, though it has stabilised somewhat since its June lows.

Bank Indonesia left rates unchanged on Wednesday after raising them by 100 basis points this year, signalling it would rather support the rupiah through market-based measures than another increase.

Fakhrul Fulvian, chief economist of Trimegah Sekuritas Indonesia said "the next important signal must now come from fiscal policy".

In North Asia, the Korean won depreciated 0.3%. South Korean stock markets were closed for the Chuseok holiday.

The won is the only emerging market currency in the region besides the Singapore dollar and Chinese yuan to have strengthened this year against the dollar. It's up around 5% so far, as AI-trade linked inflows have offset energy price pressures.

Currencies with limited exposure to the technology cycle and greater vulnerability to higher energy prices could come under renewed pressure, Lloyd Chan, FX strategist at MUFG said in a note, factors that will increasingly differentiate performance among currencies.

Anticipation of near-term US rate hikes also weighed on regional equities, with MSCI's EM Asia equities index .MIMS00000PUS down 0.8%.

Stocks in Jakarta .JKSE led losses, falling 1%, while those in India .NSEI and the Philippines .PSI dropped 0.9% and 0.6%, respectively.

Investors are also looking ahead to a summit between US President Donald Trump and Chinese President Xi Jinping in Washington on Thursday, where tensions over trade, technology and Tehran are expected to play out against a backdrop of pomp and ceremony.

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