SYDNEY Asian shares and currencies looked set to surge on Thursday after the U.S. Federal Reserve stunned markets and decided not to taper its asset-buying program, sending U.S. bond yields and the dollar into a tailspin.
The prospect of low U.S. rates for longer should be a major relief to emerging markets which have been suffering from capital flight back to the developed world, with shares in Mexico and Brazil already leading the way higher.
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 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 16 basis points to 2.69 percent. Futures contracts for the Fed funds rate and Eurodollars romped higher right out to 2016 as the market also pushed back the likely timing of the first hike in U.S. rates.
That in turn sent the dollar tumbling across the board. The euro shot up 1.2 percent to $1.3505, having hit its highest in almost eight months.
The dollar dropped a full yen to 98.15, a move that might restrain any rally in Japanese equities. Against a basket of currencies, the dollar shed a full percentage point .DXY.
Equity investors cheered as the Dow Jones industrial average .DJI gained 0.74 percent, while the S&P 500 .SPX added 0.92 percent to a fresh record.
Asian shares traded in the U.S. followed suit. The BNYMellonAsia ADR Index .BKAS rose 2.6 percent to hit highs not seen since June 2008.
All of which should boost hard-hit emerging market (EM) currencies such as the Indonesian rupiah and Indian rupee.
"The surprise from the Fed means that bond yields are going to be lower than we previously expected by the end of the year," said Tony Morriss, head of interest rate research at ANZ.
"This is good news for a renewed search for yield, credit spread performance and easing of some selectively intense pressure in EM markets."
However, it 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 $0.9500, an effective tightening in conditions that will pressure the Reserve Bank of Australia (RBA) to cut rates to compensate.
In contrast the extension of U.S. stimulus was seen as unambiguously favorable for global commodity demand and prices.
Spot gold stormed ahead to $1,361.89, a gain of over $60 on the session, while copper futures jumped 1.5 percent to $7,184.15.
Brent crude climbed $2.55 to $110.74 a barrel, while U.S. crude was up at $108.21 compared to $105.32 early on Wednesday.