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Euro closes higher after Fed's raises rates

NEW YORK: Catching its breath after a series of significant losses, Europe's single currency climbed against the dollar and yen on Wednesday even though the Federal Reserve raised interest US rates.

For most of the day, the euro drifted in a three-quarters of a cent range, briefly dipping after the Fed's rate news and then erasing those losses to close 0.42 percent higher.

Its gains against the yen were even more dramatic, totalling nearly one percent at the close.

Financial markets had largely expected the Fed would lift its closely watched federal funds rate, the level at which banks lend money to each other, by a quarter of a point to 5.75 percent. To amplify the move, the Fed also raised its less used discount rate, on direct loans to banks, by a quarter of a point to 5.25 percent.

Often higher interest rates attract fresh capital into a nation and thereby help boost the currency's value.

The Fed also warned that inflation remained the biggest threat to the economy, just one day after America rolled into its longest period of expansion ever.

"There is not much here for the currency markets, the Fed did what we expected them to do but there was nothing to indicate that (future rate hikes) will be faster or bigger than what the markets has priced in," said Tomas Jelf, currency analyst at Warburg Dillon Read.

Although the dollar briefly flexed its muscle against the euro, there was no follow-through even though Wall Street largely kept its composure, dipping into negative territory only late in the day. The Dow Jones industrial average fell nearly 38 points to close just above 11,000.

"The dollar has already come so far that we did not expect it to explode from these levels," said Chase Securities currency economist Chris Widness.

Overnight, the euro was bolstered when a top economist at Germany's Ifo research institute said the euro's weakness was exaggerated. Gernot Nerb said he was sticking to the Ifo's forecast that the euro would appreciate to $1.05/10 by year-end and said there was a 50/50 chance of moderate monetary tightening from the European Central Bank on Thursday.

With the Fed decision out of the way, the market has shifted its focus to the European Central Bank, which will deliberate whether to raise rates on Thursday.

Even though price pressures have picked up in Europe, many analysts say the ECB would be hard pressed to hike rates now because this would choke off the region's economic recovery while also looking like a desperate move to save the euro.

"They are damned if they do and damned if they don't," Jelf said about the ECB's dilemma.

Looking ahead, most analysts still expect the dollar to fare well and the euro and yen to come under pressure amid concerns about structural problems in the respective nations.

The Australian dollar received a lift from Tuesday's bigger than expected interest rate hike by the nation's central bank. Similarly Canada's central bank is expected to hike rates on Thursday, possibly giving the Canadian dollar some new lift.

The dollar held some gains against the yen, amid conflicting comments from Japanese officials. Jiji news agency said Finance Minister Kiichi Miyazawa denied earlier reports he said he was not seeking a further fall in the yen. Vice Finance Minister Haruhiko Kuroda said Japan's foreign exchange policy remained unchanged, Jiji news agency reported.

But dealers said the dollar's break above key resistance at 108 yen opened the way for gains toward 110-111 yen and that the greenback was likely revving up for another push higher.

"There doesn't seem to be much credibility in whatever the Japanese may say, or concern that they might intervene, so we may test the highs we saw in Europe of 109, perhaps even 109.25," said John Schein, vice president at Fortis.-Reuters