* Dollar index hits 8-mth high, euro drops to 9-mth low
* Dollar rises to 1-mth high vs yen above 92 yen
* Fed officials play down step, move seen as symbolic
* Market sees rise in fed funds rate as still far off
By Kaori Kaneko
TOKYO, Feb 19 (Reuters) - The dollar leapt and the euro hit a
nine-month low on Friday after the Federal Reserve said it was
raising the interest rate it charges banks for emergency loans,
signalling it was starting to normalise monetary policy.
The timing took markets by surprise and despite assurances
from Fed officials that the step was not a precursor to a rise in
its main monetary policy tool, traders and analysts said the
market was now adjusting its sights to that eventuality.
The move also warned investors that using the dollar to fund
positions in riskier assets was set to become costlier, and
highlighted the difference between fiscal worries weakening the
euro and U.S. conditions which allowed the Fed to start removing
a key emergency measure deployed at the start of the crisis.
Although the euro recovered from its nine-month low, traders
said its breach of $1.35 opened the way to further falls.
"My feeling is that the dollar has crossed a line this
morning and from here it will probably strengthen gradually,"
said Gareth Berry, a currency strategist at UBS in Singapore.
"This will force people to take note that the Fed does appear
to be shuffling ever closer to that exit door."
The Fed said late on Thursday the discount rate would be
increased to 0.75 from 0.50 percent, effective Friday, although
it left the benchmark federal funds rate, its main policy tool,
unchanged near zero. []
The dollar index, a gauge of its performance against six
major currencies, rose 1 percent in Asian trade to 81.20 after
climbing to its highest level in eight months at 81.33 <.DXY>.
The euro fell 0.5 percent to $1.3464 <EUR=> after dropping as
far as $1.3443 on trading platform EBS, its weakest since mid-May
2009.
Fed officials said market expectations of key rate hikes had
gone too far, helping the euro stage a short rebound. But dealers
said strong selling had emerged into the rally.
Against the yen, the dollar hit its highest in a month at
92.10 yen <JPY=>. It stopped short of piercing a 200-day moving
average at 92.30 yen which has formed resistance in the past, and
has a longer-term downtrend from June 2007 coming in just above
93.00 yen.
LOOKING FOR CLUES
While the timing surprised the market, Fed Chairman Ben
Bernanke had said last week the central bank could soon raise the
discount rate. He had stressed, however, that the move would not
be akin to tightening monetary policy.
"It will take more time before there is a hike in the fed
funds rate as there need to be improvements in the U.S. economy,
such as in the labour market," said Tomohiro Nishida, treasury
department manager at Chuo Mitsui Trust and Banking.
Analysts said Bernanke would have an opportunity to explain
further in congressional testimony next week. []
Nonetheless expectations had been raised and unless the Fed
kept a pledge to keep rates low "for an extended period" in post-
policy meeting statements ahead, the market would be wary that
after this surprise it could be surprised again in the future.
Shorter-dated Treasury yields rose after the discount move,
with the two-year yield topping 0.97 percent, its highest in a
month.
"Gains in U.S. short-term interest rates after the rise in
the discount rate make players want to buy the dollar, even
though Fed officials say it is not the start of tightening," said
a trader at a Japanese bank. []
"But if there are more comments by U.S. officials playing
down the possibility of the Fed tightening, the dollar's upside
could be weighed down," he said.
In a signal that the ground may be shifting for the dollar
against the yen, the spread between three-month dollar
<USD3MFSR=> and yen Libor <JPY3MFSR=> rates narrowed on Thursday
to its tightest in six months.
The spread inverted for the first time in 16 years in August
as dollar interbank rates fell below yen rates.
But since the Bank of Japan introduced a fixed-rate operation
in December to help counter yen strength and deflation, the
spread has narrowed slowly. Many expect the BOJ will have to ease
again, even as expectations for higher U.S. rates build.
The pound fell to a nine-month low and was down 0.7 percent
at $1.5395.
Meanwhile, the Australian dollar extended losses despite
hints by Reserve Bank of Australia Governor Glenn Stevens that
further interest rate rises were likely. []
The Aussie fell 0.5 percent to $0.8887 <AUD=D4> and shed 0.7
percent against the yen to 81.63 yen <AUDJPY=R>. It also backed
off a decade high against the euro set the previous day.
(Additional reporting by Satomi Noguchi and Charlotte Cooper;
Editing by Michael Watson)
