Dollar jumps after Fed raises discount rate

NEW YORK (BestGrowthStock) – The dollar jumped, pushing the euro to a ninth month low on Thursday after the Federal Reserve said it was raising the interest rate it charges banks for emergency loans, citing improvement in financial market conditions.

The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday.

The Fed said borrowing costs for consumers and companies would not rise.

Reaction in currency markets to the news was immediate as investors and analysts took the announcement as the beginning of the Federal Reserve’s exit strategy from the massive stimulus used to curb the worst of the 2008 global financial crisis.

“The market is taking this as a tightening and that’s why we are seeing the dollar strengthening from here,” said Amelia Bourdeau, currency strategist at UBS AG in Stamford, Connecticut. “Overall it is supportive to the currency because this is the beginning of the normalization process in monetary policy.”

The announcement coincided with the opening of the February 19 global session.

The euro was last at $1.3518 down 0.7 percent from the February 18 New York close.

The euro zone single currency had traded to its lowest since May 18, 2009 after the announcement, according to Reuters data.

The dollar rose 0.8 percent against the yen to 91.90 yen.

“Bernanke did mention this in his testimony so it’s not a complete surprise,” said Nick Bennenbroek, chief currency strategist at Wells Fargo in New York. “What is a surprise though is the timing, coming at this time when most traders have left and in so short a time after he made the remarks.”

Analysts and investors did express a note of caution, however.

“I think it’s going to be very easy to over-interpret this,” said Shaun Osborne, senior currency strategist at TD Securities in Toronto. “They said this is in line with normalization in various other measures, so they’re specifying this doesn’t signal any imminent change in the fed funds rate.”

“Rather than call it a significant development, I’d say it shows the Fed is gradually moving toward normalization,” said Osborne.

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(Reporting by Nick Olivari; Additional reporting by Vivianne Rodrigues, Gertrude Chavez-Dreyfuss, Steven C Johnson and Wanfeng Zhou; Editing by James Dalgleish)

Dollar jumps after Fed raises discount rate