EMERGING MARKETS-Latam FX extends gains as Fed delivers small rate hike

* Fed raises rates by 25 bps, signals more to come * Chile's economic activity falls less than expected in December * Peru consumer prices rise 0.23% in January, below forecasts * Vale weighs on Bovespa after Q4 iron ore output edges down * Latam stocks down 0.2%, FX adds 0.8% (Updates prices, adds details and comment) By Bansari Mayur Kamdar and Amruta Khandekar Feb 1 (Reuters) - Currencies in Latin America extended gains on Wednesday, with markets pinning their hopes on the Federal Reserve slowing down the pace of its monetary tightening after the central bank delivered a small interest rate hike as expected. The Federal Reserve lifted the benchmark overnight interest rate by 25 basis points to a range between 4.50% and 4.75% but continued to promise "ongoing increases" in borrowing costs. Fed Chair Jerome Powell also said "substantially more evidence" was required to be confident that inflation was on a downward path. The MSCI's index for Latin American currencies was up 0.8% at 1944 GMT, while the U.S. dollar deepened losses after Powell's comments. "The market's up, the dollar's down; that tells me the market doesn't believe he (Powell) is going to go too tight," said Thomas Hayes, chairman at investment firm Great Hill Capital. Money market participants still see the terminal rate at under 5% by June.. "There's probably going to be two more rate hikes of 25 basis points each. That's not that much more to go in terms of rate hikes," said Louis Lau, director of investments at Brandes Investment Partners. "Markets are pricing in a peaking interest rate dynamic in the U.S. and they're looking for opportunities in other emerging market currencies that have suffered," Lau said. "That's why we expect emerging market currencies to continue to strengthen." Chile's peso climbed 1.2% against the greenback, extending early gains. Data showed the Andean country's economy beat analyst forecasts in December. The Colombian peso snapped three days of losses to gain 1.5% against the dollar, while Mexico's peso added 0.9%. Latin American stocks fell 0.2%, underperforming the 1.3%% jump in the broader emerging markets index as Chinese stocks rallied after data showed factory activity in the world's second largest economy shrank more slowly in January than in the previous month. In Brazil, the Bovespa index fell nearly 2%, as Vale slid after reporting a 1% fall in iron ore production for the fourth-quarter. Brazil's real rose 0.4% against the dollar ahead of the country's interest rate decision. Data showed producer prices in Latin America's largest economy fell to 1.29% from the previous month, while another survey showed factory activity in Brazil shrank again in January. Peru's sol fell 0.3% against the dollar after data showed a smaller-than-expected rise in inflation. Key Latin American stock indexes and currencies at 1944 GMT: Latin American market prices from Reuters Stock indexes Latest Daily % change MSCI Emerging Markets 1044.83 1.29 MSCI LatAm 2329.39 -0.22 Brazil Bovespa 111278.41 -1.9 Mexico IPC 54607.87 0.08 Chile IPSA 5307.62 -0.28 Argentina MerVal 247689.54 -2.311 Colombia COLCAP 1263.33 -2.08 Currencies Latest Daily % change Brazil real 5.0541 0.41 Mexico peso 18.6588 0.86 Chile peso 786.1 1.16 Colombia peso 4598.05 1.52 Peru sol 3.8402 -0.25 Argentina peso 187.2400 -0.13 (interbank) Argentina peso 373 2.14 (parallel) (Reporting by Bansari Mayur Kamdar and Amruta Khandekar in Bengaluru; editing by Jonathan Oatis)