EMERGING MARKETS-Currencies buoyed by steady dollar, China data; stocks rise

June 3 (Reuters) - Emerging-market currencies gained and shares rose as data showed China factory activity was recovering, but markets remained cautious as trade tensions continued to grow.

MSCI’s index of developing-world currencies and stocks touched two-week highs on Monday and looked set to extend gains to a third day.

Data showing China’s factory activity expanded at a steady but modest pace in May, helped offset some of the effect of U.S. President Donald Trump’s trade war, said Per Hammarlund, chief EM strategist, SEB.

Trump threatened punitive tariffs against Mexico last week, amid worsening trade ties with China .

A tepid dollar provided many emerging currencies with some breathing space. India’s rupee gained 0.4%. The South Korean won also jumped.

But gains on the broader currency index were kept in check by losses in other currencies. Turkey’s lira fell 0.6%, weakening for the first time in eight sessions, on discouraging economic data and uncertainty over its ties with the United States.

The threat of U.S. sanctions and a wider rupture with Western allies over Ankara’s purchase of Russian air defences has been casting doubts over Turkish assets.

“We haven’t really seen confirmation that the relations between the U.S. and Turk are improving,” said SEB’s Hammarlund.

Data on Monday from Turkey showed that factory activity fell in May. Separate data showed that inflation also fell. Rising inflation has been one of the factors pressuring the lira recently.

“The lower inflation is more supportive of the lira,” Hammarlund said. “This would be one of the offsetting factors today from negative readings coming from weak PMI and political concerns.”

Among stocks, South Korean, Indian and Russian equities gained more than 1%, helping the broader shares index.

But China shares ended mixed, with blue-chips finishing higher while the Shanghai Composite and Hong Kong shares closed lower. Stocks in Turkey also lost and U.S. stock futures pointed to a lower open on Wall Street.

On Friday, the Institute of International Finance estimated that return of worries over a global trade war has triggered the biggest outflows from emerging-market stocks since June 2013 .

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