U.S. Dollar Index Rises to 8-month Peak on Fed Announcement

In an oddly timed move, the U.S. Federal Reserve Bank directed that the U.S. discount rate, which is the rate at which the Federal Reserve lends to privately held U.S. banks, be raised to .75%, an increase of .25% effective Friday, the 19th of February.

The Fed declined to follow suit with the benchmark Fed Funds rate, however, holding it at its present low.  The news of the increase of the discount rate came as no surprise to market players, however, as Ben Bernanke, Federal Reserve Chairman, intimated last week that the discount rate would soon be hiked.  Federal Reserve officials insist, though, that that the move should not signal the withdrawing of the current loose monetary policy.  

It was suggested by a treasury manager at a Japanese bank that the U.S. economy needs to see much greater improvement, especially in the labor markets, before he believes the Fed will even consider increasing the Fed Funds rate.

Following the announcement, the U.S. Dollar Index, a measure of the U.S. currency’s strength versus a basket of six major currencies, surged to an 8-month peak.  As reported at 4:02 p.m. (JST) in Tokyo, the U.S. Dollar Index was trading up 1% at 81.20 .DXY, slightly off the 8-month high of 81.33 .DXY established after the Fed announcement.