Asia responded with relative calm yesterday to an end to the decade- long near-zero rates by the Federal Reserve, taking the historic turn in United States monetary policy in its stride.
Assurances that further rate increases would come slowly fended off further volatility, but analysts cautioned that the region faces plenty of challenges and its economies faced vulnerabilities in the year ahead.
"There is a sense of relief that they finally raised rates," Mr Chris Green, a strategist at First NZ Capital Group in Auckland, told Bloomberg. "It has removed the point of lift-off from the discussion... Now, the question is: How gradual is that normalisation profile and where do the risks lie?"
Regional central banks were the first to respond to the hike, with Hong Kong and Taiwan raising interest rates, while the Philippines and Indonesia left their monetary policy settings unchanged.
In China, the authorities took a cautious approach, saying the hike will have "some direct or indirect impact on China's external trade and international investments", and calling for further analysis to determine its extent.
But analysts at Haitong Securities led by Mr Jiang Chao said the move puts pressure on the yuan and squeezes China's room for reducing interest rates. The move would add pressure of capital outflow, they wrote in a note.
The yuan weakened against the dollar for the 10th session in a row, the longest weakening streak on record, as the central bank guided the Chinese currency lower. The spot market closed at 6.4837 per US dollar, 0.17 per cent weaker than the previous close.
Most emerging Asian currencies weakened.
The dollar pushed higher against the Japanese yen and euro in US trade, and extended those gains in Asia. It was higher against most emerging market currencies, including the Australian dollar, Malaysian ringgit and South Korean won. However, the rises were muted as most of the rate increases had been priced in previously, analysts said.
The Indonesian rupiah, the second worst-performing currency in Asia this year, however, bucked the trend and rose 0.4 per cent, ending the day at 14,005.
Bonds advanced in South-east Asia's largest economy, pushing the 10-year yield down the most in two months, after the hike boosted demand for some emerging-market assets.
OCBC economist Wellian Wiranto said the Fed rate hike should have a net positive impact for the average Indonesian, even if the linkage is rather indirect.
"As long as the relative calm stays, this should help to reduce rupiah volatility. On top of that, it can be seen in terms of impact towards domestic policy rate as well," he said.
Bank Indonesia kept its benchmark interest rate unchanged at 7.5 per cent for a 10th month, resisting pressure to cut. The benchmark Jakarta stock index rose 1.6 per cent.
In Malaysia, whose economy is reeling under the effects of a slowing China, spiralling oil prices and uncertain domestic politics, analysts expect Bank Negara Malaysia to hold its interest rate at 3.25 per cent next year to support private consumption spending.
The ringgit, the worst-performing regional currency, closed 4.3130 against the US dollar. Minister in the Prime Minister's Department Wahid Omar expects the ringgit to average at 4.2 against the dollar next year following the hike.
Analysts cautioned that higher interest rates would pose problems for economies that were too reliant on debt-fuelled growth.
"Emerging markets have suffered in the wake of lower growth in China and lower commodities prices. Higher rates will hurt those countries with significant external USD-denominated debt," said head of Pioneer Investments Kenneth Taubes.
Asia, he said, is the least vulnerable, "with China, India and Philippines showing the most resilience".
Francis Chan in Jakarta, Esther Teo in China and Trinna Leong in Kuala Lumpur