Dollar Supported by Fed Move

Although there was some profit-taking during the dollar's recent rally, the Fed's first step toward tightening is bullish.
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By Omer Esiner of Travelex

The U.S. dollar pared some of last week's impressive gains as investors scaled back expectations that the

Federal Reserve

will raise its key lending rate sooner than previously expected.

he greenback soared to a new eight and a half-month, trade-weighted high last week after the Fed announced a 25 basis-point hike in the discount rate, the rate it charges commercial banks for emergency loans. The mostly technical adjustment to bring the discount rate back toward its historical premium over the Fed's primary lending rate, the fed funds rate, fanned speculation that U.S. officials may be closer to normalizing broader monetary conditions and boosted the U.S. dollar's yield appeal relative to its major counterparts. Firmer stocks and generally improved investors sentiment overnight helped encourage some profit-taking on the USD's rally in favor of riskier investments abroad.

Reports that Germany is putting together a bailout for Greece that will be funded by all nations using the euro currency helped alleviate some concerns about sovereign credit risk further boosting market sentiment.

The rise in crude oil back above $80/barrel boosted the Canadian dollar and kept it trading at a one-month peak against its U.S. counterpart.

With no economic data on tap today, investors will look to a speech by San Francisco Fed President Janet Yellen for direction. Firmer stocks and commodities would keep the greenback near the lower end of it overnight ranges.

USD

: The U.S. dollar pared some of last week's gains against most of its major counterparts overnight. Investors were content to book some profits on the greenback's rise following the Federal Reserve's hike of the discount rate late last Thursday. The Fed announced that it had raised the rate it charges banks on emergency funds by 25 basis points to 0.75%. Officials had signaled that such a move could be imminent in the minutes from the FOMC's policy meeting released earlier last week.

The move brought the discount rate closer to its historical 1.00% premium above the Fed's primary lending rate. The hike in the discount rate, while unlikely to have any meaningful impact on the broad economy or financial markets, was the latest signal that monetary officials are growing increasingly confident in the health of the economy. It was also the latest attempt by the Fed to wind down some of the emergency credit-easing facilities put in place during the height of the financial crisis. While the USD has moderated from its recent highs, it should continue to outperform most of its major rivals over the medium term. The normalizing of policy continues to contrast the more dovish outlook for lending rates in the U.K., the euro zone and Japan. Further speculation that the Fed will hike rates sooner than previously expected should continue to support the USD.

EUR

: German magazines over the weekend reported that policymakers were in advanced stages of planning a bailout for Greece that would be funded by nations using the single currency. The total package is said to be around 20 to 25 billion euros, with each nation anteing up an amount that would be calculated by the proportion of capital it holds at the European Central Bank. Germany would likely put up 4 billion to 5 billion euros itself. The bailout talk helped to assuage some concerns about Greece's credit problems and added to the generally improved sentiment throughout financial markets overnight. Still, the euro should continue to suffer from a very limited upside as similar problems in other peripheral eurozone nations weigh. An expected bond issuance by Athens before mid-March should act as a key gauge of market sentiment toward Greek sovereign debt. Soft demand for Greek bonds at the auction would likely send the single currency sharply lower.

CAD: The Canadian dollar touched on a new one-month peak against the greenback overnight, broadly supported by firmer stocks and commodities overnight. Crude oil rose to five-week high of over $80/ barrel, which was particularly supportive of the loonie.

In addition to the support of firmer commodities, the CAD has been buttressed by improving domestic economic news, its exposure to an improving U.S. economy and the relative health of Canada's fiscal position, especially compared to its G7 counterparts. Going forward, the CAD should remain relatively underpinned, even in the event that oil moderates significantly back below $80/barrel.

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

here

. 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.