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Updated 1945 GMT

By Johann M Cherian and Shubham Batra

Sept 13 (Reuters) - Latin American currencies were set for their best day in 20 months on a softer dollar on Friday, as investors priced in the possibility of a bigger interest rate cut by the U.S. Federal Reserve, alongside a rate hike by the Brazilian central bank.

MSCI's index tracking regional currencies .MILA00000CUS rose 1.9% to scale a two-week high as the dollar slipped.

Markets focused on comments from a former U.S policymaker who argued that a 50-basis point rate cut is still an option week. Worries about a global growth slowdown had weighed on currencies of the commodity exporters in the region recently.

On expectations that the Fed's monetary easing cycle could broaden out rate cuts by central banks in developing markets, Goldman Sachs raised its 12-month target on the MSCI EM equities index .MSCIEF to 1175 - around 8.5% above current levels.

Brazil's real BRL= strengthened 1.2% after data showed economic activity in the region's largest economy slowed less than expected in July, reinforcing expectations that its central bank will err on the side of caution on monetary policy week. 0#BCBWATCH

Bank of America analysts expect Brazil's benchmark rate to rise from 10.50% currently to a peak of 12% in January 2025.

Copper producer Chile's CLP= peso rose 0.7%, with prices of the metal hovering a two-week high.

Peru's sol PEN= was up 0.5%, after its central bank trimmed the benchmark interest rate as expected by 25 basis points to 5.25%.

The sol has outperformed Latin American currencies and is down 1.7% year-to-date.

"Peru's positive real policy rate and a current account surplus on top of FDI inflows should continue to support (the sol's) regional outperformance," said Elias Haddad, senior markets strategist at Brown Brothers Harriman.

Oil exporter Mexico's peso MXN= strengthened 1.8%, to touch more than a two-week high, while Colombia's peso COP= advanced 0.3% and hit a one-week high, as prices of crude oil rose. O/R

Traders kept a close eye on political developments in Mexico after lawmakers approved judicial reforms earlier in the week - the run up to which saw the peso hit its lowest levels in two years.

On the equities front, the index tracking Latam bourses .MILA00000PUS jumped 2.2% to log its best day in five weeks. Heavyweight Brazil's Bovespa .BVSP rose 0.8%, underpinned by oil giant Petrobras PETR4.SA.

Mexican stocks .MXX climbed 0.2% and Peru's benchmark index .SPBLPGPT added 1.6%, while Colombia stocks .COLCAP edged 0.2% lower.

Elsewhere, Russia's rouble RUB= weakened 2%. The central bank unexpectedly raised its benchmark interest rate by 100 basis points to 19%, saying that inflation remained stubbornly high and a tightening was to reduce it.

Key Latin American stock indexes and currencies

(Reporting by Johann M Cherian and Reshma Rockie George in Bengaluru
Editing by Tomasz Janowski and Alistair Bell)

((johann.mcherian@thomsonreuters.com;))