Asia Braces for Market Volatility as Fed Starts to Taper

Asian officials braced for some financial-market volatility after the Federal Reserve announced plans to reduce its monetary stimulus, with South Korea pledging to act to cool currency fluctuations if needed.

Recent movement by the South Korean won against the yen has been “relatively fast” and is “problematic,” Vice Finance Minister Choo Kyung Ho said by phone in Seoul today. Authorities won’t leave currency volatility unattended and will act preemptively if needed, he said. The tapering may result in fund outflows from Hong Kong and cause its interest rates to rise ahead of the U.S., Financial Secretary John Tsang said at a briefing today.

Emerging-nation currencies fell today, led by the won’s biggest drop in six months, while Asian stocks pared a third day of gains after the Fed said it is trimming its monthly bond purchases to $75 billion from $85 billion. The Fed’s decision underscores its desire to adjust policy smoothly and avoid the sudden surprises that unsettled markets in 2013, Ramin Toloui, Singapore-based global co-head of emerging- markets portfolio management at Pacific Investment Management Co., said in an e-mail.

“It gets the Hamlet ‘to taper, or not to taper’ out of the way while emphasizing the continued bias in the Fed’s reaction function to remain accommodative,” said Toloui. In Asia and globally, the move will be “positive for the front-ends of yield curves, positive for credit, negative for low-carry currencies versus the U.S. dollar and positive for higher-carry currencies,” he said.

‘Welcome Move’

The won slid 0.9 percent, the most since July 8, to close at 1,060.22 per dollar in Seoul. The decline was the biggest among 11 Asian currencies tracked by Bloomberg.

The U.S. shift was embraced in some quarters. Chinese Vice Finance Minister Zhu Guangyao said it was a “welcome move” and as “a first step to transitioning its monetary policy from abnormal to normal, it reflects that the U.S. economy is stabilizing.”

In Europe, German Finance Minister Wolfgang Schaeuble called the Fed’s decision understandable given the international consensus “that we have to step back from a very loose monetary policy stance in a very cautious way.”

Malaysia is strengthening fiscal policy with measures such as deferring high-import content to counter the impact of tapering, Second Finance Minister Ahmad Husni Hanadzlah told reporters in Kuala Lumpur. The Philippine central bank said it will watch for any need to fine-tune policy as it foresees “some” financial-market swings in the near term.

U.S. Traction

Some policy makers who saw their markets battered by the threat of such a Fed move earlier this year welcomed the clarity provided by the U.S. decision.

“This step towards normalization is welcome, as this means the U.S. economy is growing with some traction setting in” that will benefit trade in emerging-market economies, Philippine central bank Governor Amando Tetangco said in a text message. “There may be some volatility in the financial markets near-term, but not in the order of what we had seen in May-June this year.”

The Fed announcement provides more clarity on the direction of its monetary policy, Bank Indonesia Deputy Governor Perry Warjiyo said in a text message. The tapering is positive for financial-market stability, including that of the Indonesian rupiah, he said, adding that the amount of stimulus reduction is “slightly less than expected.”

Rupiah Losses

The rupiah declined 0.5 percent to 12,223 per dollar as of 2:57 p.m. in Jakarta, prices from local banks show. It reached 12,239 earlier, the lowest level since December 2008. A more visible U.S. economic recovery will also help Indonesian exports, Warjiyo said.

“The taper is not a surprise,” Michael Feroli, JPMorgan Chase & Co.’s chief U.S. economist in New York, wrote in a note. The policy-setting Federal Open Market Committee “seems pretty eager to get out of the business of asset purchases, and they are now on a path to do that within a year.”

In Japan, Chief Cabinet Secretary Yoshihide Suga said that the Fed’s move is appropriate, based on economic indicators such as employment and consumption, while declining to comment on financial markets or the yen’s moves.

More Prepared

The Fed’s decision is a “mild” stimulus reduction and markets are not likely to be surprised by the “moderate changes,” Indian Finance Minister P. Chidambaram said in an e-mail. The country is more prepared to deal with the consequences of the taper, if any, than it was in May, he said.

India’s rupee fell 0.3 percent to 62.2650 per dollar as of 1:44 p.m. in Mumbai.

Emerging-market stocks plunged after May 22, when Fed Chairman Ben S. Bernanke said for the first time it could withdraw stimulus, and then rebounded after the Fed decided in September to maintain its quantitative-easing program.

Thailand is prepared for the Fed’s move, and the timing of the decision is “positive,” Finance Minister Kittiratt Na Ra-nong told reporters in Bangkok.

“Even as taper begins, the Fed is unlikely to move on interest rates anytime soon, with interest rates likely to remain close to zero in 2014,” Malayan Banking Bhd. analysts including Singapore-based head of foreign-exchange research Saktiandi Supaat said in a note. “The Fed move did not create the ruckus that had taken place when Chairman Bernanke first announced the possibility of a taper.”

To contact the reporters on this story: Cynthia Kim in Seoul at ckim170@bloomberg.net; Sharon Chen in Singapore at schen462@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Paul Panckhurst at ppanckhurst@bloomberg.net

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