EMERGING MARKETS-LatAm currencies set for steepest decline in nearly two weeks on hot US inflation

By Ragini Mathur, Sudeshna Ghoshal and Niket Nishant

Oct 14 (Reuters) - Latin American currencies were on track for their worst day in nearly two weeks after higher-than-expected inflation in the US pushed the dollar to fresh 18-month highs.

MSCI's gauge of regional currencies .MILA00000CUS slipped 0.5% and were on track for their steepest one-day decline since October 1 if losses hold.

Consumer prices in the US rose faster than expected last month, data showed, bolstering bets that the Federal Reserve could raise rates again as soon as this month.

"September core inflation was hotter than expected and this has reinforced the view that the Federal Reserve has more work to do to contain price pressures," said James Knightley, chief international economist at ING.

Rate hikes by the Fed tend to boost the US dollar and hurt emerging market currencies, adding another challenge for investors seeking exposure to the region.

Varying political and inflation outlooks, combined with other domestic factors, have already led to a divergence in LatAm currencies in recent weeks.

Brazil's real and Mexico's peso fell 0.13% and 0.77%, respectively. Peru's sol , one of the region's best-performing currencies, was largely unchanged.

The dollar index was perched at 102.58, close to an 18-month high.

BRAZILIAN STOCKS MUTED

MSCI's gauge of Latin American stocks .MILA00000PUS also dropped 1%, declining for the second consecutive day.

Brazil stocks were subdued, with the Bovespa Index .BVSP flat after data showed services activity in Latin America's largest economy shrank 0.1% in August compared with the previous month, adding to signs of a slowdown.

Together with renewed inflation pressure, the data makes the central bank's policy choices harder. Uncertainty ahead of this month's presidential runoff also kept investors on edge.

Additionally, Brazil announced on Tuesday that it would send a bill to Congress aimed at forgiving micro-entrepreneurs' debt with the government.

"The administration continues announcing measures that could potentially damage the fiscal outlook in coming years," Citi analysts said in a note.

A senior International Monetary Fund official said Argentina needs to overhaul its tax system, including removing value-added tax exemptions, to move its fiscal consolidation forward.

The country's stock index .MERV fell 0.6%, while its currency was up marginally versus the dollar.

Data on Tuesday showed monthly inflation rose slightly to 1.9% in September from August, though the annual rate eased a little.

The IMF earlier this week cut its growth forecasts for Latin America and the Caribbean for this year and next. It said most of the region was getting little lift from the AI boom that has helped other economies absorb the energy shock from the Middle East war.

Separately, Uganda's central bank held an emergency meeting and raised its main interest rate by 2.25 percentage points to 12%.

The move aims to stop a sharp slide in the shilling , which has hit repeated record lows as oil importers scramble for dollars. The currency rose 4.7% after the decision.

Key Latin American stock indexes and currencies: