* Euro falls to 9-mth low vs dollar as Fed ups discount
rate
* Oil down 1.4 pct, gold drops; US stock futures fall 1.1
pct
* Fed's Bullard: expectations of policy rate hike
"overblown"
* Policy risks intensifying after U.S., China actions
By Kevin Plumberg
HONG KONG, Feb 19 (Reuters) - The U.S. dollar rose,
commodity prices dropped and stocks fell on Friday after the
Federal Reserve unexpectedly lifted an emergency lending rate
for the first time since the financial crisis.
U.S. stock futures <SPc1> fell 1.1 percent after the Fed
raised its discount borrowing rate by a quarter percentage
point, weighing on Asia. Major European stock markets <>
were expected to follow, opening down as much as 0.4 percent,
according to financial bookmakers.
Though the Fed cited improving market conditions, traders
said the action had come sooner than expected and moved the
central bank one step closer to pushing up benchmark lending
rates, which would 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 (policy)
normalisation has begun," Robert Rennie, chief currency
strategist at Westpac in Sydney, said in a Reuters chat room.
The U.S. dollar index, a gauge of its performance against
six major currencies, rose more than 1 percent to its highest
in eight months at 81.30 <.DXY> after the Fed move, which was
announced after Wall Street stock markets had closed.
The euro <EUR=> fell to its lowest in 9 months, though it
briefly trimmed losses after St. Louis Federal Reserve
President James Bullard said market expectations for a policy
rate hike this year were "overblown." []
Still, coming so soon after China delivered two surprising
increases in banks' reserve requirements 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.
Ample amounts of cheap cash fuelled a strong rally in
stocks and commodities last year. But as governments and
central banks around the world start withdrawing that stimulus
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
for a second day, losing 1.8 percent <.MIAPJ0000PUS>, with the
financial, materials, consumer and energy sectors all hit hard.
Hong Kong stocks led declines in the region as the Hang
Seng index sank 2.5 percent <>. Shares of global bank HSBC
<0005.HK> were the biggest drag on the index, down 1.9 percent.
Japan's Nikkei share average <> finished down 2
percent <>. Mizuho Financial Group <8411.T>, Japan's
second-largest bank, lost 2.8 percent, while top bank
Mitsubishi UFJ Financial Group <8306.T> fell 1.3 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 0.5 percent to $1.3458 <EUR=> and has
dropped around 16 cents in the last two months. The single
currency has been dogged by Greece's debt problems and tepid
economic growth in the 16-nation region, even as U.S. economic
prospects appear to improve.
Sterling also fell to a 9-month low against the dollar,
dropping 0.9 percent to $1.5380 <GBP=>. In all likelihood, the
Fed will keep winding down monetary stimulus, while the Bank of
England may have to extend its own growth friendly policies to
shore up the UK's patchy 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 to investors that they 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 to 0.9439
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.
U.S. crude oil futures <CLc1> fell 1.4 percent to $77.97 a
barrel <CLc1>, hurt by dollar strength that rocked commodities
across the board.
Gold in the spot market was down 0.8 percent at $1,102.10
an ounce <XAU=> and has declined more than 6 percent since
December.
Copper on the London Metal Exchange fel1 1 percent.
(Editing by Kim Coghill)
