February 18, 2010 05:22 PM

The US dollar added to recent gains as US economic data continued to outperform and the Fed provided a late session surprise. US jobless claims did jump to 473K from 442K but the blip was attributed to data aggregation difficulties in a multitude of states (computer problems were the apparent cause). Producer prices came in hotter than expected at 0.3% MoM for the core while the Philly Fed manufacturing index jumped to 17.6 from 15.2 prior. The details of the Philly report were even more constructive than the headline suggested as new orders rocketed to highs not seen since 2004 while the employment component showed a healthy move higher as well.

The FOMC shocked markets late in the session by raising the discount window rate 25 basis points to 0.75%. The target funds rate remains unchanged at 0.25%. While the Fed stated that this does not constitute a change in policy they will be hard-pressed to convince the market that this does not, at the margin, suggest a tighter Fed sooner rather than later. This coupled with the fact that the ECB remains handcuffed by the debt problems in the periphery and that the BOE and BOJ are on hold as far as the eye can see, puts the US dollar in a unique position to see gains continue in the short to medium term. 1.3500 is clearly the short-term support zone for EUR/USD and a dip through there overnight could be very problematic for the longs indeed.