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IMM currency futures end mixed after Fed rate hike

CHICAGO: IMM currency futures edged upward but still remained mixed at Tuesday's close after the US central bank met market expectations and tightened US credit by a quarter percentage point.

The Federal Reserve's Open Market Committee voted to raise the Fed funds rate target to 6.0 percent from 5.75 percent. The Board of Governors approved increasing the discount rate to 5.50 percent from 5.25 percent.

The Fed said economic conditions and considerations are "essentially the same" as when the FOMC met in February, and the group "remains concerned" that inflation remains the main risk to the US economy.

"By identifying inflation as the greater risk the Fed has put the market on notice that additional tightening is likely," wrote Marc Chandler, senior currency strategist with Mellon Financial Group, in afternoon commentary. "That said, the market has the next hike (May 16) priced in."

Shortly after the FOMC's action, Bank of America raised its prime lending rate to 9.0 percent from 8.75 percent, effective Wednesday.

The US rate hike news provoked only a muted response in currencies, although the euro managed to regain some ground lost just before the decision was announced.

"Zero (happened)," said one floor broker with a commission house near the currency close. "(There was) a little short-covering rally but that was it."

Another floor broker said much of the day's activity occurred just before the US rate decision news, with the euro deepening losses and touching a fresh session trough on signs of weak long liquidation as nerves grew that the Fed might hike by 50 basis points instead of 25.

"I think what happened was that the market was sitting good and long and something spooked it, maybe a rumour about a 50 (basis point) hike," said another floor broker after the close. "A lot of longs got squeezed out...but there are still longs."

US Treasury bond and stock index futures showed slightly more reaction, with each market immediately trimming its gains before rallying again to new day's highs late.

Brokers also widely expected the Bank of Canada to raise its rates by a quarter percentage point early Wednesday.

The second broker noted that one fund was active again on Tuesday, selling sterling early and then covering part of it.

Sterling had advanced briefly after Chancellor Gordon Brown laid out the U.K. budget.

Fund selling also was seen in yen and Canadian dollars, with fund buying apparent in June euros, the second broker added.

Futures had begun pit trading weaker and moved little after the US trade deficit in January grew to a record $28.00 billion from a revised $24.61 billion in December.

At settlement, June yen lost $0.000068 to $0.009483, euros fell $0.00890 to $0.97040, sterling rose $0.0038 to $1.5738, Canadian dollar firmed $0.0009 to $0.6824, Swiss francs lost $0.0056 to $0.6038, Mexican peso rose $0.000300 to $0.105175, and the Australian dollar gained $0.0024 to $0.6108. -Reuters