* Dollar hits 8-mth high vs FX basket after Fed move
* Euro hovers near earlier nine-month low vs dollar
* Analysts eye further strength in greenback
* U.S. CPI due at 1330 GMT
(Adds quote, detail)
By Neal Armstrong
LONDON, Feb 19 (Reuters) - The dollar hit an eight-month
high against a currency basket on Friday in the wake of the
Federal Reserve's surprise increase in the interest rate it
charges banks for emergency loans.
The Fed said late on Thursday the discount rate would be
increased to 0.75 percent from 0.50 percent, effective Friday,
although it left the benchmark federal funds rate, its main
policy tool, unchanged near zero. []
Currency markets took the decision as a signal that the U.S.
central bank was coming closer to tightening its benchmark rate,
despite assurances from Fed policymakers to the contrary.
"The market has been transfixed on what the Fed has done.
Although people had been forewarned by the Fed about the move
this did not prevent the surprise at the timing," said Gavin
Friend, currency strategist at nabCapital.
"This has allowed the market to make a relative judgment
that things in the U.S. are looking better than elsewhere".
At 1236 GMT, the dollar was up nearly 1 percent versus a
basket of currencies <.DXY> at 81.120 after rallying to an
eight-month high of 81.342.
The euro <EUR=D4> traded down 0.8 percent compared with late
New York trade at $1.3509, hovering close to an earlier
nine-month low of $1.3444 versus the dollar.
The dollar has made gains over recent weeks on the back of
positive U.S. economic data, while structural problems in the
euro zone have weighed on the single currency, prompting it to
fall more than 10 percent against the greenback since December.
"We continue to favour the dollar and expect that further
improvement in U.S. data. combined with persistent euro zone
sovereign credit concerns will be dollar-supportive," UBS
analysts said in a note.
Against the yen, <JPY=> the dollar rose 0.7 percent to 91.86
yen, close to an earlier one-month high of 92.10 yen.
Technical analysts eyed the 200-day moving average as the
next resistance level to watch at 92.30.
"The Bank of Japan may require more quantitative easing and
the ECB cannot change its stance, so the dollar can rally
further against the yen and the euro," said Antje Praefcke,
currency strategist at Commerzbank.
U.S. CPI data due at 1330 GMT will provide a fresh look at
the inflationary picture in the U.S. economy. Economists in a
Reuters survey expect a 0.3 percent increase in January compared
with December's 0.2 percent rise. <ECONUS>
"CPI should be relatively benign, and I don't think that
will be a key driver of the dollar today," said HSBC currency
strategist Paul Mackel.
TIMING
While the timing surprised the market, Fed Chairman Ben
Bernanke had said last week the central bank could soon raise
the discount rate. He stressed that the move would not be akin
to tightening monetary policy.
St. Louis Federal Reserve Bank President James Bullard said
investors' belief in the high probability of a rise in the Fed's
benchmark rate this year was 'overblown', while another Fed
policymaker, Dennis Lockhart, voiced a similar view.
[]
The Australian dollar fell sharply against its U.S.
counterpart despite hints by Reserve Bank of Australia Governor
Glenn Stevens that more rate rises were likely. []
The Aussie <AUD=D4> fell 1 percent compared with late New
York trade to $0.8925.
Sterling also remained under pressure, dropping to a
nine-month low of $1.5345 versus the dollar <GBP=D4> as the
pound struggled after weak UK retail sales data. []
(Additional reporting by Jessica Mortimer)
