Israeli military pledges response to Iran attack
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Dollar rises to 5-month high, pressuring risky EM assets
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Sri Lanka fails to reach deal on restructure terms with bondholders
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Indonesian rupiah hits 4-year low, prompts c.bank intervention
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Stocks down 1.7%, FX off 0.3%
By Bansari Mayur Kamdar
April 16 (Reuters) - Emerging market stocks and currencies fell on Tuesday as tensions between Iran and Israel and diminishing hopes of a rate cut by the U.S. Federal Reserve kept the riskier markets on edge.
The MSCI index for emerging market stocks shed 1.7%, while currencies slipped 0.3% by 0830 GMT.
Israel's shekel weakened slightly against the dollar after closing the previous session 0.6% higher in the aftermath of Iran's retaliatory strike on Israel.
Investors remained cautious about Israel's response as international pressure for restraint grew amid fears of an escalation of the conflict in the Middle East. Israel's GDP data was also due later in the day.
Also on tap are two separate legislations this week in the U.S. House of Representatives on aid to Israel and Ukraine, more than two months after the Senate passed a bill combining the two.
Meanwhile, the U.S. dollar soared to a five-month high as traders also pushed back expectations for the timing and size of any rate cuts from the Fed.
The strength of the dollar pushed the Indonesian rupiah to its weakest in four years as the market reopened after the Eid al-Fitr holidays, prompting the central bank to intervene.
Other Asian currencies like the Indian rupee and Vietnam's dong touched a record low, while China's yuan briefly hit a five-month low against the dollar before recouping some of the losses.
Data showed China's economy grew faster-than-expected in the first quarter. However, China stocks fell, with small-cap companies leading losses, as March economic indicators showed a recovery is losing momentum.
"China certainly isn't out of the woods just yet – it has been battling against a cocktail of headwinds including its ongoing property crisis, weak consumer confidence and tumbling exports in March," said Victoria Scholar, head of investment at Interactive Investor.
Foreign investors significantly reduced their holdings in Asian bonds last month, as traders reassessed their expectations of a Fed rate cut and amid caution over national elections in South Korea and India.
Elsewhere, the Russian rouble weakened against the greenback to its lowest level since late October, while South Africa's rand eased 0.6%.
Sri Lanka's dollar-denominated bonds slid after the government said it had failed to strike an agreement on debt restructuring terms with its bondholders.
Pakistan Finance Minister Muhammad Aurangzeb said on Monday he would hold talks with the International Monetary Fund (IMF) during his visit to Washington and hoped to get a new loan agreement in place as soon as possible.
HIGHLIGHTS:
** Israeli military pledges response to Iran attack amid calls for restraint
(Reporting by Bansari Mayur Kamdar in Bengaluru; editing by Philippa Fletcher)