The Dollar Index gained nearly 1%, as the FED raised interest rates to 0.75%

Friday, February 19, 2010

For the first time in three years, the Federal Reserve unexpectedly increased the discount interest rate by 0.25bps. The dollar rallied across the board on this surprise move, including climbing to a nine-month high against the Euro.

The greenback headed for a sixth week of gains against the single European currency as the central bank took another step to withdraw from the unprecedented measures it used to halt the financial crisis.

Immediately after the release of the Fed's statement, the EUR/USD tumbled to a new low of 1.3444, from 1.3568 - plunging a total of 0.9% over the course of yesterday's Forex online session. The greenback traded at 91.90 yen from 91.81 yen after earlier advancing to 92.09 yen, the highest since Jan. 12.

The Fed surprising decision to raise the benchmark interest rate will current enhanced speculations that the US will withdraw its stimulus measures ahead of other developed countries - further fueling the dollar to appreciate.

This unexpected rate hike comes in the wake of the yesterday's release of a powerful string of significant economic data. The US January’s PPI, reporting an increase of 1.4% (core +0.3%) from December -this 1.4% rise in prices paid to factories, farmers and producers followed a prior 0.4% between November and December of last year.

The PPI reports shows significant inflationary pressure from higher commodity prices – crude oil prices rose by 9.6% last month and natural gases increased by 25.5%. Later today, the US will release its CPI – generally considered less volatile than the PPI, the January’s Consumer Price Index is expected to show an increase of 0.3% from the previous month, versus a 0.1% rise between November and December of last year.

Moreover the number of Americans filling for first-time unemployment insurance unexpectedly shot up by 31,000 last week, as the number of initial jobless applications hit 473,000, versus predicted 440K. Despite an increase in sales, companies are still reluctant to hire, and may demand more and stronger evidence that indeed sales are increasing and that the market is beginning to recuperate.

Yesterday’s sequence of powerful economic indicators for the US concluded with the Philly Fed Manufacturing Index. The report showed that manufacturing activity in the Philadelphia region expanded in February for its sixth consecutive straight month, as orders surged to its highest level in more than 5 years – further exemplifying how factories are leading the economic recovery. The index fell in line with expectations, rising to 17.6 this month from 15.2 in January.



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