* MSCI EM stocks down 2.5%, FX steady

* EM stocks, FX heading for modest weekly gains

* KOSPI slumps nearly 6%

* U.S. imposes forced labor duties on 60 trading partners

By Utkarsh Hathi

July 24 (Reuters) - An index tracking emerging market stocks

fell on Friday, as intensifying hostilities in the Middle East

and higher oil prices fuelled expectations of a Federal Reserve

rate hike next week, while currencies were mixed against a

steady dollar.

Oil prices looked set to log a fourth straight weekly gain,

surging 35% to cross $100 in the previous session, with Yemen's

Houthi attacking tankers in the Red Sea and U.S. President

Donald Trump threatening "major military punishment" against

Iran and its Houthi allies.

The surge prompted traders to more than double their

expectations of a Fed rate increase next week to a one-in-three

chance, according to CME Group's FedWatch tool.

However, some investors argued that markets may be

aggressive in pricing the risk for a hike.

"We need to see second round effects that are independent of

the move in energy prices and we're not seeing signs of that

yet," said Maximilian Kunkel, chief investment officer for

CEEMEA at UBS.

"Such second round effects could be a significant increase

in unit labour costs, which tends to be a big driver of

inflation longer term. However, we're not seeing a significant

acceleration in wage growth. On the flip side, productivity is

actually starting to move up given the use of technology.".

Renewed concerns over heavy AI spending after Alphabet

and Tesla forecast higher capex also weighed on

sentiment, with hyperscalers Microsoft ( MSFT ), Meta Platforms ( META )

and Amazon ( AMZN ) set to report next week.

They are likely to give investors more cues on the

sustainability of an AI-driven rally in markets like South Korea

and Taiwan that are up above 50% for the year.

MSCI's global EM stocks index fell 2.5%, although

it remained on track for modest weekly gains thanks to an

earlier recovery in Asian tech-heavy bourses.

On Friday, South Korea's KOSPI slumped nearly 6%,

leading selloff in Asian equities, as chipmakers SK Hynix ( SKHY )

and Samsung slid 8.3% and 7.6%

respectively, while Taiwan's tech-heavy benchmark

slipped 2.7%.

Bucking the broader trend, MSCI's index tracking Central and

Eastern Europe gained 1%, with Polish and

Hungarian benchmarks up 0.7% and 0.4%, respectively.

Energy-laden Romanian benchmark was down 0.2%, though

heading for its longest weekly winning streak in seven years,

boosted by higher oil prices.

MSCI's emerging market currencies gauge was

flat against the U.S. dollar and heading for weekly gains.

Most Asian currencies were trading flat to higher, while

currencies in the emerging Europe were muted against the euro,

with the Hungarian forint edging 0.07% lower, while

the Polish zloty traded 0.1% higher.

Kunkel added that UBS continues to expect positive return

from emerging market currencies, citing interest rate carry as

the primary driver of performance.

South Africa's rand fell 0.6% and extended declines

from previous session's sharp losses after the central bank

unexpectedly kept rates on hold. The currency was heading for

its biggest weekly drop in four months.

The Turkish lira declined 0.2%. The country's

central bank left benchmark lending rates unchanged on Thursday

for a fourth consecutive meeting as widely expected. Moody's is

expected to review Turkey's credit rating later in the day.

Separately, Sri Lanka's international sovereign bond

maturing in 2033 slipped 0.8%, according to

data from Tradeweb, after the Trump administration imposed new

tariffs of 10% and 12.5% on goods from 60 trading partners.

Pakistan's and Indonesian bonds also came under pressure, edging 0.4% lower.

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see