EMERGING MARKETS-Ukraine assets rally on hopes of end to political crisis

LONDON Fri Feb 21, 2014 5:12am EST

LONDON Feb 21 (Reuters) - Ukraine's dollar bonds rose off record lows on Friday on expectations of a deal to resolve conflict over the country's political future, dragging up the hryvnia's exchange rate to the dollar.

The gains come despite a fresh delay to the second tranche of a Russian loan that stands between Kiev and a debt default and doubts over the viability of a deal between President Viktor Yanukovich and the pro-Europe opposition..

After all-night negotiations mediated by visiting European Union foreign ministers, aimed at calming street violence in which at least 75 people have died in two days, the presidential press service said an agreement would be signed at noon (1000 GMT).

Debt insurance costs on Ukraine, which had hit their highest since 2009, also fell 40 basis points, while the hryvnia firmed 1.2 percent

Ukraine's 2017 dollar bond UA080875819= rose almost 2 points to 86 cents in the dollar, off recent record lows of 83, according to Reuters data. Its June 2014 issue rose a point, according to Tradeweb, while the 2023 bond was 1.5 cents higher.

"The market is pricing in a deal with the opposition," RBS analyst Tatyana Orlova said. "But this is not the end of the story. What I am reading is there is a deal but the devil is in the detail ... The urgent need is for a technocratic cabinet that could take steps to avert default."

The Russian rouble also firmed slightly, helped by hopes for a deal in Ukraine as well as by end-month tax payments which lifted the Russian currency 0.2 percent off the five-year lows hit earlier this week.

But Orlova said the strength would be shortlived.

"Preliminary data shows the population has started converting rouble deposits into hard currency which is a very negative trend. If it continues, weakening pressure on the rouble will resume," she added.

Elsewhere the Nigerian naira fell 1 percent in volatile trade, a day after respected central bank governor Lamido Sanusi was suspended by the president.

Central banker Doyin Salami said Nigeria would be able to defend the naira with $41 billion in reserves.

On stock markets, MSCI's main index rose 0,6 percent off one-week lows. However Chinese mainland stocks erased their weekly gains on back of the yuan's biggest weekly drop since 2012 which has sparked debate on whether the currency's trading band will be widened.

The emerging markets index was on track for a weekly loss after two weeks of gains while emerging equity funds chalked up their 17th straight week of outflows.

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