The dollar leapt to nine-month highs yesterday after the US Federal Reserve took a big step towards unwinding its massive programme to stimulate the economy.
Markets were caught off-guard by the Fed's announcement late on Thursday that it had raised its discount rate – the level at which commercial banks tap the central bank for emergency funding. While the move had been well-flagged, its timing was a surprise and refocused investors on worries about how economies and companies will cope as central banks around the globe start to withdraw support for credit markets and tighten monetary policy, leading to higher interest rates.
In a sign of the Fed's increasing confidence in the strength of the US economic recovery, the discount rate was raised by a quarter of a percentage point to 0.75 per cent – above the benchmark Fed funds rate, its intended target rate for banks to lend to each other.