Dollar Gains on Fed Rate Hike

The US dollar gained on most major currencies after the Fed announced rate hikes prompting a decline in risk sentiment. Boris Schlossberg of GFT Forex stated, “We had a shock to the system yesterday with the Fed’s discount rate hike. The first reaction was to take risk off the table.” The dollar also posted a six week gain on the troubled euro as investors speculate whether the Federal Reserve will withdraw emergency measures along with the recent rate hike. Earlier the euro hit a nine month low against the dollar after European finance ministers told Greece to implement austerity measures and gave the troubled nation until March 16th to comply. The Fed boosted the rate it charges banks for direct loans from 0.50% to 0.75%. Many experts believe the move indicates that the Fed is ready to start withdrawing stimulus measures taken at the beginning of the global recession. Vassili Serebriakov of Wells Fargo stated, “The dollar should continue to do well against weaker G10 currencies like the euro, the yen and the pound” and also said that the rate hike “was an important first step on the way to policy normalization.”

Fed Statements

In a statement the Fed said that “the typical maximum maturity for primary credit loans will be shortened to overnight” on March 18th and that “These changes are intended as a further normalization of the Federal Reserve’s lending facilities.” The Fed also said that the recent moves “do not signal any change in the outlook for the economy or for monetary policy.” In January the US cost of living rose less than forecast and a measure of prices excluding food and energy declined for the first time since 1982. The combination of the rate hike and the rise in risk aversion benefited the greenback in global currency markets.

Fed Says Hike Does Not Signal Monetary Policy Changes

The greenback’s gains were pared after Fed Bank of St. Louis President James Bullard said that the perception that borrowing costs will increase is “overblown” while Atlanta Fed President Dennis Lockhart stated that the hike does not signal a change in monetary policy. Andrew Busch, of Bank of Montreal said, “The CPI report adds some credence to the commentary from Bullard and Lockhart. But when the Fed raises an interest rate, even the discount rate, its tightening policy The U.S. is attempting to exit extreme monetary policy looseness. That should boost the dollar versus the euro.” Most traders believe the euro will remain under pressure until the Greek crisis is resolved.