Feb 19.
Last night the US Federal Reserve surprised markets by raising its discount rate, the interest rate it charges banks for emergency loans, to 0.75 per cent, from 0.5 per cent, citing improved conditions in financial markets.
The Fed played down suggestions that the rise was part of a broader tightening of monetary policy as the US economy recovers, but the dollar rose to new highs against the euro and sterling.
Currencies tend to strengthen on the back of firmer relative interest rates, because they suck in capital flows.
As the Fed moves to the next stage of its “exit strategy”, the increased discount rate paves the way for term deposits and reverse repurchase agreements, mechanisms that the Fed has said could be used to drain the central bank’s reserves.
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