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Update: Fed rate decision lifts Asia markets, emerging currencies
[HONG KONG] The US central bank's decision to hold off hiking interest rates sent emerging market currencies and most Asian markets advancing on Friday, as concerns eased over an outflow of cash as the global economy suffers a painful slowdown.
After one of the most eagerly awaited meetings in years, the US central bank's head Janet Yellen said the ongoing crisis in China and recent turmoil on world markets had played a role in keeping borrowing costs at zero.
The Fed's decision followed widespread warnings about the dire impact a rate increase could have, with the World Bank predicting this week it would cause a "perfect storm" in financial markets.
It also came despite a string of data in recent months showing the US economy, the world's biggest is well on track to recovery.
Ms Yellen told a news conference: "A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States.
"We've seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward," Ms Yellen said of the emerging market economies.
"The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect." The news pushed the dollar lower. It was buying 119.80 yen (S$1.40) in Tokyo trade, compared with 120.90 yen in Asia Thursday. The euro was at US$1.1403 against US$1.1302 a day earlier.
Struggling emerging market currencies, which have been rising this week on hopes the bank would hold fire, were also higher. The South Korea won added 0.27 per cent, the Malaysian ringgit gained 0.50 per cent, India's rupee was 0.82 per cent higher and the Singapore dollar was up 0.06 per cent.
"For emerging-market central bankers, the Fed has given them some much-needed breathing room," said Jonathan Lewis, a principal at New York-based Samson Capital Advisors LLC.
"Postponing a Fed tightening gives these central bankers room to be more accommodative, without their actions being offset by a tighter Fed," he added, according to Bloomberg News.
Economists had warned a rise now could severely hurt emerging economies as investors would likely withdraw more cash to the United States for better and safer returns.
This, in turn, would have forced other central banks to hike rates - at the same time as trying to foster growth - in a bid to support their currencies and prevent a flight of capital.
However, analysts pointed out that the uncertainty of when rates will rise could be as damaging to emerging markets as an actual lift off. There is now increasing talk the Fed could wait until 2016 before moving.
Most Asian stock markets advanced with Shanghai ending 0.38 per cent higher at the end of another roller-coaster week, while Seoul put on almost one percent and Sydney ticked up 0.46 per cent.
Hong Kong was 0.17 per cent higher in late trade.
However, Tokyo finished almost two percent lower with investors spooked by Yellen's downbeat assessment of the global outlook while exporters were also hurt by the stronger yen.
The comments also weighed on US stocks, with the Dow, S&P 500 and Nasdaq all ending in negative territory.
Matt Maley, an equity strategist at Miller Tabak & Co LLC in New York, said that with the decision now out of the way, traders "are going to start focusing more on the problems that caused the correction in August, which is weakness in China and other emerging markets and a rough time on the earnings front".
World markets have witnessed more than a month of wild volatility after China devalued its yuan currency, fuelling worries about the state of the world's number-two economy and main driver of global growth as well as its leaders' crisis control.
The concerns have been exacerbated by a series of weak indicators suggesting growth will come in this year lower than 2014, which was the worst performance in a quarter of a century.
Shanghai reflected the uncertainty surrounding the Chinese economy, with shares seeing wild swings over the week - it fell around six percent over Monday and Tuesday, jumped almost five per cent Wednesday and slipped heavily again Thursday.
The index surged more than 150 per cent in a year before hitting a June 12 high, since when it has plunged about 40 per cent on fears about high prices and the state of the Chinese economy.