Dollar hits eight-month high in London trade

The dollar hit an eight-month high against a currency basket on Friday in the wake of the Federal Reserve's surprise increase in the interest rate it charges banks for emergency loans. The Fed said late on Thursday the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday, although it left the benchmark federal funds rate, its main policy tool, unchanged near zero.
Currency markets took the decision as a signal that the US central bank was coming closer to tightening its benchmark rate, despite assurances from Fed policymakers to the contrary. "The market has been transfixed on what the Fed has done. Although people had been forewarned by the Fed about the move this did not prevent the surprise at the timing," said Gavin Friend, currency strategist at nabCapital. At 1236 GMT, the dollar was up nearly 1 percent versus a basket of currencies at 81.120 after rallying to an eight-month high of 81.342.
The euro traded down 0.8 percent compared with late New York trade at $1.3509, hovering close to an earlier nine-month low of $1.3444 versus the dollar. The dollar has made gains over recent weeks on the back of positive US economic data, while structural problems in the eurozone have weighed on the single currency, prompting it to fall more than 10 percent against the greenback since December. "We continue to favour the dollar and expect that further improvement in US data. combined with persistent eurozone sovereign credit concerns will be dollar-supportive," UBS analysts said in a note.
Against the yen, the dollar rose 0.7 percent to 91.86 yen, close to an earlier one-month high of 92.10 yen. Technical analysts eyed the 200-day moving average as the next resistance level to watch at 92.30. The Australian dollar fell sharply against its US counterpart despite hints by Reserve Bank of Australia Governor Glenn Stevens that more rate rises were likely. The Aussie fell 1 percent compared with late New York trade to $0.8925. Sterling also remained under pressure, dropping to a nine-month low of $1.5345 versus the dollar as the pound struggled after weak UK retail sales data.