Asian markets cheered by Fed rate outlook

Friday, 27 January 2012 00:01 - - {{hitsCtrl.values.hits}}

Reuters: Asian shares and the euro firmed on Thursday after the U.S. Federal Reserve said it would keep interest rates low for a longer-than-expected period, providing ample liquidity to help spur growth.

Equities, commodities and U.S. Treasuries all rose on Wednesday after the Fed policy meeting, while the prospect for unfavourable interest rate differentials undermined the dollar, pushing it to a near five-week low against the euro as the U.S. central bank took the spotlight away from Europe’s debt woes.

MSCI’s broadest index of Asia-Pacific shares outside Japan extended gains, rising 0.5 percent to within sight of its highest in nearly three months. Japan’s Nikkei average rose 0.1 percent.

“Expectations for abundant liquidity available for a longer period of time supported markets across the assets, although the reaction was much stronger than anticipated,” Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyo.

“The Fed also left the door open for a third round of quantitative easing to protect growth, and that, coming at this juncture, eased nervousness,” he said.

The euro was at $1.3106, off a near five-week high around $1.3120 reached on Wednesday, while the yen stood at 77.76 yen, after hitting a two-month low near 78.29 yen on Wednesday.

A prolonged period of super easy monetary conditions is negative for the dollar, but the euro will remain pressured by the euro zone debt crisis and the market’s focus will shift back to Europe, said Credit Agricole’s Saito.

The Fed said on Wednesday it would keep interest rates near zero through at least 2014, which was longer than many investors anticipated. Fed Chairman Ben Bernanke said at a news conference the central bank was ready to offer the economy additional stimulus. The Fed also took the historic step of setting an inflation target. U.S. Treasuries rose on Wednesday while hopes that abundant money available would prompt investors to allocate some of that to gold pushed bullion up 2.5 percent to above $1,700 an ounce on Wednesday for its biggest one-day gain in four months.

Worries about Greece possibly facing a disorderly default persisted and curbed aggressive risk taking, but a report showing German business sentiment unexpectedly rose for the third month in a row in January eased concerns about Europe’s largest economy falling into a recession.

This followed data showing resilience in euro zone manufacturing and services, also suggesting the region may avoid a recession. The ample euro liquidity filtered through dollar funding markets, pushing the key interbank rate for dollars down further, away from around 30-months highs at the start of the year, while a gauge of dollar funding strains improved to levels not seen since August 2011 on Wednesday.