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Emerging markets party as Fed keeps punch bowl

John B. Mueller | Getty Images

The Federal Reserve's surprise decision to leave its extraordinary monetary stimulus program unchanged has given emerging market assets a shot in the arm, with strategists now forecasting a multi-week rally.

"In terms of emerging markets, this outcome is possibly as positive as you're going to get. People weren't expecting to see the Fed as dovish as they were," Chris Weston, chief market strategist at IG Markets told CNBC on Thursday.

(Read more: No taper! Did Bernanke fool the Street?)

"We're in for a good couple of weeks for emerging market currencies and equities," he said.

Indonesia's Jakarta Composite surged 7 percent, while the Philippine Stock Exchange index gained 3.6 percent. Meanwhile, currencies including the Indonesian rupiah, Malaysian ringgit and Korean won rallied between 1-2 percent against the U.S. dollar early Thursday, a far cry from a few weeks ago, when investors were aggressively dumping emerging market assets on their deteriorating economic fundamentals.

In an unexpected turn of events the U.S. central bank defied expectations, keeping its $85 billion-a-month bond buying program intact. Most major Wall Street banks and firms expected the Fed to pare back its monthly asset purchases by $10 billion to $15 billion.

Fed decision impacts emerging markets

Mark Matthews, head of research, Asia at Julius Baer said the delay in tapering coupled with the increased prospect of Janet Yellen becoming the next Fed chairman has brightened the outlook for emerging market assets.

"I can't see much that will get in the way of the rally," he said. "Bernanke has said no tapering because it's data contingent. I doubt he will do it in October as there's unlikely to be enough good data. The earliest is December, which is several months from now."

(Read more: Emerging markets lead Asia higher after Fed surprise)

Furthermore, with U.S. Treasury yields declining, investors will search for yield in other parts of the world, he said. The yield on the 10-year U.S. Treasury fell to 2.69 on Wednesday from 2.86 percent before Bernanke's statement, its lowest level since August 13.

While the continuation of the "money train" is positive for risk assets, it's unclear how long the good times will last.

"The fact that the 'money train' will continue for a while means the risk of a hard-landing or a balance of payments crisis has been greatly reduced, if not averted. But, the Fed only postponed its tapering and will not print money forever," wrote Frederic Neumann, co-head of Asian Economics Research at HSBC.

(Read more: Fed's 'no' to taper sends stocks flying)

"To avoid another rough summer, policy-makers in Asia will need to use this brief window to implement structural reforms to put Asian growth on a more sustainable path. That would make for a true bull market," he said.

Jeffrey Halley, senior manager of foreign exchange trading at Saxo Capital Markets said while he expects an aggressive rally in emerging market currencies in the near-term, the Fed has effectively "put off the day of reckoning to some day in the future" by keeping its punch bowl in place.

By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H