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By Michael O'Boyle and Asher Levine
MEXICO CITY/SAO PAULO (Reuters) - Latin American currencies, stocks and bonds soared on Wednesday after the U.S. Federal Reserve surprised investors by announcing it would keep its bond-buying program unchanged, spurring demand for the region's higher-yielding assets.
Stock markets across the region shook off losses and local currency bonds gained after U.S. policymakers expressed worries that higher borrowing costs could hurt an economic recovery in the United States.
Brazil's real jumped nearly 3 percent to close at 2.1935 per dollar, its strongest since late June, while Mexico's peso surged 2 percent to 12.6650 per dollar, trading around a one-month high and at its 200-day simple moving average. A break of that measure could suggest further gains.
The Fed's easy money policies had driven investors to seek higher returns in emerging markets and those assets suffered under the prospect of the Fed reducing its monetary stimulus, an idea first floated by Fed Chairman Ben Bernanke in May.
The relief gains made by emerging market assets after the Fed decision could extend into Asia's trading day if the reaction by U.S.-traded shares of companies based in the region are any indication.
China Life Insurance Co Ltd's <LFC.N><601628.SS> American Depositary Receipts (ADR) surged on the Fed's decision, gaining 1.87 percent on the day. The ADRs of Philippine Long Distance Telephone Co <PHI.N> <TEL.PS> closed up 3.74 percent. That compares to the 1.22 percent rise in the U.S. benchmark Standard & Poor's 500 stock index.
The Bank of New York Mellon Emerging Markets 50 <.BKTEMT> , a measure of emerging market ADRs traded in New York, climbed over 3 percent on the day.
Policymakers across Latin America expressed caution as they eyed the sharp gains - which could still flip to big outflows once the Fed begins to draw down its unprecedented easy money polices.
"Without a doubt the continuance of the stimulus sends a signal of tranquility to markets, but we, all emerging markets, need to recognize that this stimulus cannot be permanent," Mexican Finance Minister Luis Videgaray said at an event in Mexico City.
"Eventually, the withdrawal of stimulus will come, and we have to be prepared for the volatility this will imply."
His Brazilian counterpart, Guido Mantega, who has been one of the most vocal critics of what he calls the Fed's "confusing" guidance, said the decision should ease market volatility and help Latin America's largest economy grow a bit faster.
"Volatility could be dissipating and this will help improve the business climate," said Mantega, adding that the Brazilian economy may grow slightly above his own estimate of 2.5 percent this year.
In the first wave of reaction, investors trimmed bets on further interest rate hikes in Brazil and added to bets on another cut in Mexico, which has been hit by an economic slowdown and is closely linked to the United States.
Bernanke told reporters the Fed was aware that its actions had implications for emerging markets but said a stronger U.S. economy was the overall goal.
"I think my colleagues in many of the emerging markets appreciate that notwithstanding some of the effects that they may have felt, that efforts to strengthen the U.S. economy and other advanced economies in Europe and elsewhere, ultimately redounds to the benefit of the global economy, including emerging markets as well," Bernanke told reporters.
Latin American officials have fretted this year that less U.S. stimulus could spur a reversal of unprecedented capital flows that poured into the region in recent years.
Yields on Brazilian interest rate futures sank across the board as investors cut bets on tighter borrowing costs in Latin America's top economy.
Stubbornly high inflation in Brazil has dented consumer and business confidence and pushed the central bank to raise its benchmark rate to 9 percent, with further hikes eyed.
"The prospects of tighter (U.S) monetary policy are kicked down the road," said Jankiel Santos, chief economist with Espirito Santo Investment Bank in Sao Paulo. "That means a stronger currency in Brazil, which in turn means less inflation and less need for higher interest rates."
Meanwhile, yields on Mexican interest rate swaps fell as investors added to bets that Mexico's central bank could lower borrowing costs in the coming months.
After the Fed expressed its worries about the U.S. economy, Mexican bank Banorte said the Mexican central bank would likely cut its main rate by 25 basis points to a new record low of 3.5 percent when it meets in late October.
"If there is not a sufficient pace of economic growth in the United States to withdraw stimulus, then this tells you that growth will be weaker in Mexico," said Eduardo Avila, an analyst at brokerage Monex in Mexico City.
Stocks across the region also soared higher. Brazil's Bovespa <.BVSP> reversed early losses to rise 2.64 percent, driven by shares of the most widely-traded commodities exporters and banks, and closing at its highest in nearly 4 months
Mexico's IPC index <.MXX> climbed 1.86 percent to just over a one-month high.
(Additional reporting by Alexandra Alper in Mexico City and Daniel Bases in New York)