The U.S. dollar opened broadly stronger on Friday morning, still buoyed by the Federal Reserve's late Thursday announcement that it will raise the discount rate, the one it charges to banks for emergency loans, by a quarter percentage point to 0.75%.
The U.S. central bank stressed that its hiking of the discount rate, which goes into effect today, should have no impact on the outlook for the Fed's main interest rate, the fed funds rate, which it reiterated will remain near zero for quite a while.
Still, the greenback soared across the board, hitting nine-month highs against the euro and sterling, and a one-month peak against the Japanese yen, as many investors interpreted the move as a sign the Fed might be more confident about the direction the economy was headed and that its action could be a step toward an eventual increase to its benchmark overnight rate.
Before the financial crisis, the discount rate had been a full percentage point higher than the fed funds rate, a difference that amounted to a penalty banks had to pay the Fed for emergency loans. However, at the peak of the financial crisis, the Fed had narrowed that gap to roughly 25 basis points. So the tightening of the discount rate was the Fed's way of taking a step toward a return to normalcy. The Canadian dollar slipped to a four-session low against its U.S. rival, dragged down by the greenback's rally, which also weighed on gold prices.
The U.S. consumer price index for January was released at 8:30 a.m. ET. coming in lower than expected.
: The U.S. dollar extended impressive gains from late in the previous session after word broke that the Federal Reserve had raised the rate it charges to commercial banks for emergency loans. The Fed's discount rate, which is totally separate from its chief tool, the fed funds rate, which it uses to steer the economy, was increased to 0.75% from 0.50%.
The Fed's decision to boost the discount rate had been telegraphed by the U.S. central bank. On Wednesday, the release of the minutes from the Fed's late January meeting hinted at such a move. Still, many investors were caught off guard, particularly since the Fed made the announcement at 4:30 p.m. ET on Thursday after Wall Street had closed and markets had thinned.
The dollar rallied as traders took the Fed's announcement as a sign that the recovery was on better footing, and perhaps it could lead to an eventual hike to the Fed's benchmark fed funds rate sooner than many expect. Given the dollar's steep overnight gains and the Fed's unchanged outlook for broader monetary policy, the dollar could succumb to a modest bout of profit-taking ahead of the weekend.
The U.S. CPI rose 0.2% on the month in January which was a touch cooler than the 0.3% forecast. Backing out volatile food and energy costs, U.S. consumer prices unexpectedly declined 0.1% last month vs. expectations for a +0.1% figure. With consumer prices contained, the slightly softer than expected CPI report might weigh on risk aversion, which would tend to buoy riskier assets like stocks and commodities at the expense of the greenback.
: The euro tumbled to a fresh nine-month low against the broadly stronger greenback. The Fed's decision to boost the discount rate at which it charges commercial banks for emergency loans weighed on risk appetite. Still, the single currency has steadily fallen out of favor over the last several weeks on concerns about the precarious state of finances in Greece and with other members of the euro community. Investors fear that Greece's ballooning public finances could potentially put downward pressure on eurozone growth and push back the timing of an ECB interest rate hike.
: The Canadian dollar pared its losses after nearing lows for the week against the greenback after benign U.S. consumer inflation data and a rise in Canadian retail sales offered some support to the loonie. Canadian retail sales rose 0.4% on the month in December, which was just below the 0.5% forecast but an improvement from the previous month's upwardly revised -0.5% reading.
: The Australian dollar reversed course from a recent three-week peak against the U.S. dollar despite remarks overnight from the head of Australia's central bank who hinted at more interest rate increases this year. The Aussie dollar and other commodity-backed units tumbled in step with weaker oil and gold prices, which sank on the back of the stronger U.S. currency.
Omer Esiner serves as the Senior Currency Market Analyst at Travelex, Inc. a global financial institution specializing in corporate foreign exchange services and international payment solutions. In this capacity, he monitors, analyzes and interprets the economic, financial, political and technical factors that drive the movements of more than 100 currencies for Travelex. Mr. Esiner explains the currency markets' reaction to market events to clients, employees and members of the media.
You can view his daily reports, recording briefings, and quarterly reviews posted
. As an expert in foreign exchange, Mr. Esiner is quoted regularly by the financial media including The Wall Street Journal, CNN, Dow Jones Newswires, Reuters, the Nightly Business Report, National Public Radio, among others. Based in Washington, D.C., Esiner joined Travelex in February 2000. Prior to his current position, Esiner was a currency trader for several years. Mr. Esiner holds a bachelor's degree in economics from the University of Maryland, College Park. He is fluent in Turkish and proficient in Spanish.