GLOBAL MARKETS-Shares surge, yields and dollar fall as Fed stuns

Thu Sep 19, 2013 2:18am EDT

* Fed jolts by not tapering in protest against higher market rates

* US dollar, Treasury yields dive; stocks, commodities jump

* Asian shares, currencies benefit as borrowing costs fall globally

* European markets seen opening at least 1.3 pct higher

By Wayne Cole

SYDNEY, Sept 19 (Reuters) - Asian shares and currencies flew higher on Thursday after the Federal Reserve stunned markets by choosing not to taper its asset-buying programme for now, sending global bond yields and the dollar into a tailspin.

From Jakarta to Manila, Tokyo to Sydney investors celebrated the prospect of prolonged stimulus in the world's largest economy. MSCI's broadest index of Asia-Pacific shares outside Japan jumped 2.3 percent to a four-month peak.

Indonesia's main stock index climbed 4.4 percent, the Philippines 3.1 percent, Australia 1.1 percent and Japan's Nikkei 1.8 percent.

European bourses woke in a good mood as Eurostoxx 50 futures climbed 1.7 percent with gains of 1.3 to 1.4 percent for France, Germany and the UK.

The chance that U.S. interest rates could stay low for longer was further enhanced by news from the White House that noted-dove Janet Yellen was the front-runner to take over the Fed when Ben Bernanke steps down in January.

"The Fed chose an extremely dovish course of action," said Michelle Girard, a senior U.S. economist at RBS. "It did not just postpone tapering for three months - these developments open the door for a longer-lasting QE3 programme."

"This, in turn, may open the door for a later start date for rate hikes."

All of which was a huge relief to emerging markets, which have been suffering as higher yields in the rich world attracted away much-needed foreign capital.

"Markets are thrilled, and much needed reprieve for battered EM investors is on its way," said Frederic Neumann, co-head of Asian economics research at HSBC. "With Chinese data having turned up, and the Bank of Japan running at full speed, it looks like Asia might get its mojo back."

Still, he cautioned that the Fed would have to start tapering at some point so policymakers in Asia need to use this brief window to make structural reforms to put growth on a more sustainable path.

FED PROTEST SEEN

The Fed's decision to keep its asset buying at $85 billion a month was seen as a rebuff to the sharp rise in Treasury yields over recent months, which was proving a headwind for the housing market and the U.S. economy in general.

"This is a major Fed protest against the tightening of financial conditions," said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.

"The Fed is very worried that recent tightening of financial conditions is sizable and, probably more important, the back-up in yields is too swift to be able to comfortably conclude that the economy will not slow too much."

The bond market got the message and 10-year Treasury yields tumbled 17 basis points to 2.68 percent. That was an effective easing in world financial conditions as Treasuries set the benchmark for borrowing costs almost everywhere.

Yields on Japanese debt, for instance, promptly dropped to four-month lows.

Futures contracts for the Fed funds rate and Eurodollars had romped higher on the Fed news as the market also pushed back the likely timing of the first hike in U.S. rates from 2014 to 2015.

That in turn sent the dollar tumbling across the board. The euro was up at $1.3529, having already gained 1.2 percent on Wednesday to its highest in almost eight months.

Against a basket of currencies, the dollar lost 1.1 percent in under 24 hours to hit its lowest since February.

Only against the yen did it show some resilience, as the Bank of Japan is itself only in the early stages of a bond-buying program even Larger than that of the Fed.

While the dollar was softer at 98.30 yen, that was up from a trough of 97.76.

Equity investors cheered as the Dow Jones industrial average gained 0.95 percent, while the S&P 500 added 1.22 percent to a fresh record.

All of which boosted hard-hit emerging market (EM) currencies such as the Indonesian rupiah and Indian rupee. The Thai baht, Malaysian ringgit and Singapore dollar were all trading markedly higher.

However, the Fed surprise also created a headache for central banks in Australia and New Zealand, which would much prefer their currencies to be weaker.

The Australian dollar surged 1.5 percent to $0.9498, an effective tightening in conditions that will pressure the Reserve Bank of Australia to cut rates to compensate.

In contrast, the extension of U.S. stimulus was seen as an unalloyed positive for global commodity demand, and prices.

Spot gold stormed ahead to $1,363.06, a gain of over $60 from early Wednesday, while copper futures jumped 1.8 percent to $7,314.50.

Brent crude added another 26 cents to $110.86 a barrel, up from a low of $107.64 on Wednesday. U.S. crude reached $108.54 compared with $105.32 early on Wednesday.