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Dollar up after surprise Fed rate hike for bank loans


Agence France-Presse
First Posted 11:09:00 02/19/2010

Filed Under: Foreign Exchange Markets, Markets & Exchanges

NEW YORK ? The US dollar rose to a nine-month high against the euro on Thursday after the Federal Reserve moved to increase the interest rate it charges on loans to banks.

The euro traded at $1.3535 around 2200 GMT in New York compared with $1.3598 late Wednesday, falling to its lowest level against the greenback since May 19, 2009.

The dollar also appreciated against the Japanese currency, to 91.75 yen from 91.23 yen.

After the stock market closed Thursday, the Federal Reserve said it was increasing from Friday the interest rate it charged on emergency loans to banks in a move to normalize lending following radical measures taken to jolt the economy from recession.

The Fed said the hike in the discount rate, or the primary credit rate, to 0.75 percent from 0.5 percent reflected the easing of the financial crisis that resulted from a home-mortgage meltdown.

The action sent the dollar sharply higher against all of the major currencies.

"Although the Fed went out of their way to say that this does not equate to a change in their monetary policy outlook, action speaks louder than words," said Kathy Lien, director of currency research at Global Forex Trading.

"Their decision to begin normalizing rates before the next central bank meeting indicates how hawkish they must be and how serious they are about tightening monetary policy," she said.

"The most important takeaway is that the Fed is beginning to implement an exit strategy which is more than what many of the other central banks are doing and therefore this action will be extremely positive for the dollar," she said.

Lien expected the euro to break below the 1.3500-dollar level "in the near future."

Samarjit Shankar, an analyst with the Bank of New York Mellon, said the Fed move "boosted the US dollar across the board with investors believing this may signal the Fed is closer to eventually raising the Fed funds rate."

He said the greenback's knee-jerk gains were likely to dissipate as market participants digested the full import of the decision.

The euro had managed to rise above the 1.3600 level early Thursday, benefiting from some profit taking on the dollar, which had enjoyed a strong rebound, analysts said.

Last week, the euro slid to a nine-month low of $1.3532, hit by worries that eurozone countries such as Portugal, Ireland, Italy, and Spain could suffer similar fiscal problems as bloc member Greece.

The euro's fall continued despite a deal signed by the European Union on Tuesday that ensures Greece pays off its enormous deficit, which has weighed on stocks and the euro for several weeks.

EU finance ministers told the struggling Greek government to prepare "additional measures" by March 16 to put its finances in order.

In late New York trade, the dollar was higher at 1.0821 Swiss francs from 1.0782 Wednesday.

The British pound fell to $1.5537 from $1.5670.



Copyright 2014 Agence France-Presse. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.



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