Asian stock markets yesterday rallied for a second day and the US dollar clocked up advances against most other currencies after the US Federal Reserve finally lifted interest rates for the first time in almost a decade.
The widely expected move was met with a surge in shares in New York and Europe, as well as Latin America, as the US central bank reiterated its view that the world’s No. 1 economy is in rude health.
It also brings to an end months of speculation and uncertainty that had rattled world markets and fueled concerns that the US economy’s recovery was not as strong as thought.
Photo: Bloomberg
“There’s a sense of relief that they finally raised rates,” said Chris Green, a strategist at brokerage and wealth management firm First NZ Capital Group in Auckland.
“This is a net positive in terms of market sentiment. It’s removed the point of lift-off from the discussion, we’re over that hurdle. Now the question is: how gradual is that normalization profile and where do the risks lie,” he told Bloomberg News.
US Fed Chair Janet Yellen said the decision “recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans.”
Rates were cut to near-zero in 2008 by the Fed as part of a drive to fend off the ravages of the global financial crisis as it tore into the US economy, scything jobs and sending world stocks into free fall.
The bank now sees US growth picking up pace to 2.4 percent next year, despite a slowdown in most other world economies, particularly China.
Future rate hikes would be “gradual,” it added, forecasting 100 basis points throughout next year.
Yellen said the move represents a US economy that “is a source of strength to the emerging markets and other economies around the globe.”
However, she added that there was still room for improvement in the jobs market, while inflation was still below target.
Asian traders tracked global gains. Taipei ended 1.7 percent higher, while Tokyo closed up 1.6 percent. Sydney climbed 1.5 percent, Shanghai put on 1.8 percent and Hong Kong added 0.8 percent.
The Hong Kong Monetary Authority (HKMA) raised its base rate for the first time in nine years, following the Fed’s lead overnight, and flagged the risk of rising capital outflows from the territory.
Hong Kong’s key rate was raised to 0.75 percent, from 0.5 percent.
The Fed’s decision means that emerging-market economies will continue to experience capital outflows and downward pressure on their exchange rates, economic growth and asset markets, HKMA chief executive officer Norman Chan (陳德霖) said.
“The speed of outflows from the Hong Kong dollar will depend on US interest rate hikes and the interest-rate differential between the US dollar and Hong Kong dollar,” Chan said. “If, for whatever reason, the US interest rate rises faster than expected, then the outflows from the Hong Kong dollar and corresponding rise in interest rates will also be quicker.”
Chan said the central bank’s US$355.8 billion foreign-exchange reserves are enough to cushion the impact of the Fed’s new tightening cycle.
“We presently expect the rise in Hong Kong dollar interbank rates to be incremental,” he said.
The Hong Kong dollar traded at HK$7.7511 versus the greenback as of 10:33am, according to data compiled by Bloomberg.
The US dollar pushed higher against the yen and euro in US trade and extended those gains in Asia yesterday. It bought ¥122.50, compared with ¥121.87 in Tokyo, while the euro was at US$1.0855 against US$1.0936.
The greenback was also higher against most emerging market currencies, including the Australian dollar, Malaysian ringgit, South Korean won and Singapore dollar. However, the rises were muted as most of the rate increases had been priced in previously, analysts said.
Additional reporting by Bloomberg
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