Fed Raises Discount Rate-Dollar Soars by Michael Boutros

Asian markets were down today with both the Nikkei 225 and the Hang Seng Index losing more than 2% on news that the Fed raised its discount rate by 25 basis points, bringing the bank lending rate to .75%. Although market participants were expecting an increase in the rate, analysts were surprised by the timing of the Feds decision which comes ahead of the scheduled March 16th meeting. Futures on US indices were down as the implications of the rate hike have investors questioning whether this was the first step in the Feds monetary tightening. Many economists are in agreement about the likelihood of the Fed increasing the benchmark rate before the end of the year. Although officials stressed that this was not a deviation from the current monetary policy, some traders see the Feds actions as a test of the health of the recovery. Bank to bank lending had all but frozen during the worst recession since the 1930s. With rates higher, analysts will be looking to see if lending between banks begins to pick up and whether or not the sector can sustain itself without the use of low cost emergency loans from the Federal Reserve. The debate is sure to continue in the US on whether the Feds actions are a response to improving economic conditions, or whether this is simply the beginning as the Fed starts to reduce its balance sheets and unwind the unprecedented measures taken during the peak of the crisis.

Dollar Strength Continues

The dollar surged as investors flocked to the safe haven currency in response to the surprise hike. The dollar index hit fresh 8-month highs today testing 81.34 while USD/JPY rose to 92, a level not seen since January 12th. The euro broke 9-month lows vs. the greenback today, testing the weekly pivot near 1.3440, before settling just below the 1.35 handle. With worries about the Greek sovereign debt crisis still looming, the euro remains under considerable pressure. Should the 1.3530 resistance level hold, the single currency risks losses down to the short term support at 1.3480. Further down, demand lies at 1.3404 and 1.3290. Upside potential gains momentum past 1.3530 with supply sitting at the 1.36 figure, and 1.3670.