* Euro falls to 9-mth low vs dollar as Fed ups discount
rate
* Oil down 1.3 pct, gold drops; US stock futures fall 1.1
pct
* Hong Kong stocks sink 2 pct as banks drag
* Fed's Bullard: expectations of policy rate hike
"overblown"
* Policy risks intensifying after U.S., China actions
(Repeats to more subscribers)
By Kevin Plumberg
HONG KONG, Feb 19 (Reuters) - The U.S. dollar rose broadly,
commodity prices dropped and stocks fell on Friday after the
Federal Reserve stunned markets by lifting an emergency lending
rate for the first time since the financial crisis.
U.S. stock futures <SPc1> fell more than 1 percent after
the Fed raised its discount borrowing rate by a quarter
percentage point. []
Though the Fed cited improving market conditions for the
decision, traders said it had come sooner than expected and
moved the central bank one step closer to pushing up benchmark
lending rates, which investors fear could rob the economy of
some of its momentum and raise borrowing costs for consumers
and companies.
"The emergency easing cycle began with discount rate cuts
-- it was all about easing liquidity to banks. So the move to
raise the discount rate means the long journey towards (poicy)
normalisation has begun," Robert Rennie, chief currency
strategist at Westpac in Australia, said in a Reuters chat
room.
The dollar index, a gauge of its performance against six
major currencies, rose more than 1 percent to its highest level
in eight months above 81.250 <.DXY> after the Fed move, which
was announced after Wall Street stock markets had closed.
The euro fell around 0.5 percent to its lowest in 9 months,
before clawing back some ground after St. Louis Federal Reserve
President James Bullard, a voting member of the Fed's
policymaking body, said market expectations for a policy rate
hike this year were "overblown." []
Still, coming so soon after China unexpectedly increased
banks' reserve requirements for the second time this year, the
Fed's move worried investors, who have become quite comfortable
with extraordinary amounts of money injected into banking
systems during the financial crisis.
Investors have relied heavily on ultra-low interest rates
to provide cheap money which they could shovel into
higher-risk, higher-yielding assets such as equities and
commodities.
As governments and central banks around the world start
reeling that stimulus back in and tightening policy, markets
are bound to turn more volatile, likely curbing returns.
BANKS STUNG AFTER FED
The MSCI index of Asia Pacific stocks outside Japan fell
1.6 percent <.MIAPJ0000PUS>, down for a second day, with
banking stocks under particular pressure from the Fed move.
Hong Kong stocks led declines in the region, with the Hang
Seng index down 2.2 percent <>. Shares of global bank HSBC
<0005.HK> were the biggest drag on the index, down 1.5 percent
on the day.
Japan's Nikkei share average <> fell 1.3 percent
<>. Mizuho Financial Group <8411.T>, Japan's
second-largest bank, saw its shares drop 2.3 percent, while
shares of top bank Mitsubishi UFJ Financial Group <8306.T> fell
1 percent.
In the currency market, investors added to growing bets on
the U.S. dollar and slashed bets on others, especially
currencies of countries with poorer growth prospects.
The euro was down 0.3 percent to $1.3488 <EUR=> by midday
in Asia and has dropped around 16 cents in the last two months,
weighed down by Greece's debt problems and tepid euro zone
economic growth. Earlier on Friday the single currency weakened
to $1.3442, the lowest since May 18.
Sterling dropped 0.7 percent to $1.5435 <GBP=>, also a
9-month low. In all likelihood, the Fed will keep winding down
monetary stimulus, while the Bank of England may even have to
extend its own growth friendly policies to shore up a patchy
economic recovery.
"We think that the Fed discount rate hike will lead to more
USD strength as the market expects the Fed to start thinking
about hiking the Fed Funds rate this summer," UBS strategists
said in a note, recommending investors to sell sterling and buy
dollars.
Shorter-term U.S. bond yields were also supportive of the
dollar.
The yield on the 2-year U.S. Treasury note <US2YT=RR>,
which is sensitive to policy rates, rose in choppy trade to a
1-month high of 0.9724 percent before settling back at 0.9277
percent.
Investors were shifting from the shorter-end to longer-
maturity Treasuries, causing the difference between yields to
narrow. The spread of the benchmark 10-year yield over 2-year
yields narrowed 5 basis points to 282 basis points, though
remains not too far from historic steepness at 288 basis
points.
March U.S. crude futures <CLc1> were down 1.3 percent to
$78.04 a barrel <CLc1>, hurt by dollar strength that rocked
commodities across the board.
Gold in the spot market was down 0.6 percent at $1,104.75
an ounce <XAU=> and has declined more than 6 percent since
December.
(Editing by Kim Coghill)
