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NEWS UPDATES Asean Affairs        28 January 2011

US Fed move to boost capital inflows

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The recent move by the US Federal Reserve (Fed) to maintain its US$600bil bond-buying plan may prompt further inflows of capital into high-growth regions.

"The impact on the global economy is none other than a continuous flow of liquidity into the emerging economies as leakages induce international investors to direct their funds into high-growth regions. This will in turn lead to further strengthening of their currencies (against the greenback), causing exports to moderate," Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias said

He said with the rather grim prospects of the semiconductor sector, Asian economies would likely try to resist further appreciation of their currencies through selective intervention and measures to deter the inflow of short-term capital.

"Countries such as Indonesia, Thailand and South Korea have already imposed such quasi-capital controls to limit foreign purchases of short-term instruments."

On Wednesday, the Fed announced that it would go ahead with its US$600bil bond-buying programme to stimulate the economy by June. The central bank first announced its bond-buying policy, known as quantitative easing, last November.

"In particular, the committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase US$600bil of longer-term Treasury securities by the end of the second quarter.

"The committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase programme in light of the incoming information and will adjust the programme as needed to best foster maximum employment and price stability," the Fed said in a statement.

The central bank also left its benchmark interest rate at 0 to 0.25%. Zahidi said with more money being injected into the system, the "US dollar would remain under pressure."

"This will, however, support its external sector and the economy in general. Recent positive news in the US suggests that the overall economy may surprise on the upside following stronger business spending due to healthier corporate balance sheets. This will eventually strengthen the greenback against major currencies," he added.

CIMB Economics Research said it was widely expected that during the meeting on Wednesday that the Fed would decide to leave its target rate at 0.0 -0.25 percent and reaffirm its commitment to the US$600bil bond-purchase program.

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