Dollar at eight-month high

The dollar leapt and the euro hit a nine-month low on Friday after the Federal Reserve said it was raising the interest rate it charges banks for emergency loans, signalling it was starting to normalise monetary policy. The timing took markets by surprise and despite assurances from Fed officials that the step was not a precursor to a rise in its main monetary policy tool, traders and analysts said the market was now adjusting its sights to that eventuality.
The move also warned investors that using the dollar to fund positions in riskier assets was set to become costlier, and highlighted the difference between fiscal worries weakening the euro and US conditions, which allowed the Fed to start removing a key emergency measure deployed at the start of the crisis.
Although the euro recovered from its nine-month low, traders said its breach of $1.35 opened the way to further falls. "My feeling is that the dollar has crossed a line this morning and from here it will probably strengthen gradually," said Gareth Berry, a currency strategist at UBS in Singapore. "This will force people to take note that the Fed does appear to be shuffling ever closer to that exit door."
The Fed said late on Thursday the discount rate would be increased to 0.75 from 0.50 percent, effective Friday, although it left the benchmark federal funds rate, its main policy tool, unchanged near zero. The dollar index, a gauge of its performance against six major currencies, rose 1 percent in Asian trade to 81.20 after climbing to its highest level in eight months at 81.33.
The euro fell 0.5 percent to $1.3464 after dropping as far as $1.3443 on trading platform EBS, its weakest since mid-May 2009. Fed officials said market expectations of key rate hikes had gone too far, helping the euro stage a short rebound. But dealers said strong selling had emerged into the rally. Against the yen, the dollar hit its highest in a month at 92.10 yen. It stopped short of piercing a 200-day moving average at 92.30 yen hich has formed resistance in the past, and has a longer-term downtrend from June 2007 coming in just above 93.00 yen.
While the timing surprised the market, Fed Chairman Ben Bernanke had said last week the central bank could soon raise the discount rate. He had stressed, however, that the move would not be akin to tightening monetary policy. Analysts said Bernanke would have an opportunity to explain further in congressional testimony next week.
Nonetheless expectations had been raised and unless the Fed kept a pledge to keep rates low "for an extended period" in post - policy meeting statements ahead, the market would be wary that after this surprise it could be surprised again in the future. Shorter-dated Treasury yields rose after the discount move, with the two-year yield topping 0.97 percent, its highest in a month.
The pound fell to a nine-month low and was down 0.7 percent at $1.5395. Meanwhile, the Australian dollar extended losses despite hints by Reserve Bank of Australia Governor Glenn Stevens that further interest rate rises were likely. The Aussie fell 0.5 percent to $0.8887 and shed 0.7 percent against the yen to 81.63 yen. It also backed off a decade high against the euro set the previous day.