EMERGING MARKETS-Mexico's peso hits over 3-week low; Vale lifts Bovespa after results

* UBS does not expect rise in yields to derail equity rally * Vale jumps as much as 2%; Co upbeat on outlook for core earnings By Susan Mathew Feb 26 (Reuters) - Latin American currencies fell on Friday spooked by rising U.S. Treasury yields, with Mexico's peso hitting its lowest in more than three months, while upbeat earnings from miner Vale lifted Brazil's main stock index. The dollar index looked set to post its best session in six weeks as yields on U.S. bonds rose, putting an index of EM currencies on course for its worst day since a COVID-induced sell-off last March. Mexico's peso slipped as much as 0.9% before steadying, while declining copper and oil prices weighed on the Chilean and Colombian pesos, respectively. Rising yields have pressured risk assets over the past few sessions, but market experts are looking further ahead, noting the underlying implications are risk positive. "Rising real yields are being driven by a stronger growth outlook," said a team of strategists at UBS Global Wealth Management, led by chief investment officer Mark Haefele, although they warned that investors should brace for a period of higher volatility as markets adjust to the new backdrop. Barclays strategists noted the economic outlook, especially for manufacturing in emerging markets, remained robust. "But political developments, especially in Brazil and other LatAm countries, have added some idiosyncratic sources of volatility for EM assets." Brazil's real, which has been under pressure from the country's fiscal woes and worries about a return to populist policies by the government, was set for a weekly loss of about 2%. On Friday, the currency was flat. Brazil's main stock index bucked a global equity rout to rise 0.7%. Vale jumped as much as 2% after the iron ore miner sounded an upbeat outlook for core earnings. Meatpacker Minerva rose as much as 7.3% after announcing a record dividend of 1.03 real per share. The Brazil heavy Latam stocks index was up 0.4% but still set for its worst week since October on the rise in yields, as well as a slide in Petrobras and shares of other state-owned Brazilian firms following political interference and fears of more. "The latest setback for stocks is a volatility spike, rather than a fundamental shift in the market outlook... It is the pace of the rise in yield, rather than the level, that has created volatility," UBS strategists said, adding that they do not expect the rise in yields to derail the equity rally. Key Latin American stock indexes and currencies at 1407 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1343.80 -2.89 MSCI LatAm 2270.75 0.4 Brazil Bovespa 112990.55 0.65 Mexico IPC - - Chile IPSA 4564.91 -0.21 Argentina MerVal - - Colombia COLCAP - - Currencies Latest Daily % change Brazil real 5.5088 -0.01 Mexico peso 20.8620 -0.12 Chile peso 719.9 -0.58 Colombia peso 3621.22 -0.37 Peru sol 3.6478 0.00 Argentina peso 89.8100 -0.06 (interbank) (Reporting by Susan Mathew in Bengaluru; Editing by Kirsten Donovan)