Dollar Soars after Fed Interest Rate Change

By IBTimes Staff Reporter | February 19 2010 5:56 AM

Just after the close of New York trading, the Federal Reserve released a statement saying it would increase the discount rate it charges banks to 0.75% from 0.50%. This is a key interest rate the Fed uses for overnight lending to banks. Also included in the statement was the Fed's position that this change should not affect interest rates and financial conditions for households and businesses and is not a change in the outlook for the economy or for monetary policy.

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Immediately after the release of the Fed's statement the markets reacted strongly as traders bid up the Dollar. The EUR/USD fell to a low of 1.3444 from 1.3568 for a 1-day drop of 0.9%.

Market analysts were expecting the move to be made by the Fed, but the interest rate increase was not expected to come so soon. Despite pledges by the Fed to maintain the key Fed Funds Rate at a significantly low level for a considerable time period, the market showed its regard for the rate increase by buying the Dollar.

We may not see a rate increase in the Fed Funds rate for some time as was noted in the statement. However, this shows the Fed is paving the way for a hike in interest rates and the tightening of monetary policy. Just like the Dollar's sharp rise yesterday, we may expect the Dollar to continue to rise on the assumption of higher future interest rates.