* Dollar up broadly in aftermath of Fed discount rate hike
* Unexpectedly low CPI data take some steam out of rally
* Euro near 9-month lows, dollar rises 1 pct vs yen
(Adds details, updates prices)
By Vivianne Rodrigues
NEW YORK, Feb 19 (Reuters) - The dollar rose broadly on
Friday, touching an eight-month high against a currency basket,
boosted by the Federal Reserve's decision a day earlier to
raise the interest rate it charges banks for emergency loans.
The Fed said late on Thursday it raised the discount rate
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. For more see [].
Currency markets took the decision as a signal the U.S.
central bank was coming closer to tightening its benchmark rate
despite assurances from Fed policymakers to the contrary.
The announcement triggered a rally in the greenback as
higher rates increase the return on dollar-denominated assets.
"The markets are taking this as a clear step towards
normalization in monetary policy," said Meg Browne, a currency
strategist at Brown Brothers Harriman in New York.
"If you combine the Fed actions with the fundamentals of
the U.S. economy and contrast it with the situation in Europe,
dollar buying is more than justified."
In midday trading in New York, the dollar was up 0.8
percent versus a basket of currencies at 81.042 <.DXY> after
rallying to an eight-month high of 81.342, according to Reuters
data.
The euro <EUR=> traded as low as $1.3444 according to
Reuters data, its lowest in nine months.
The euro zone common currency recovered some of its losses
after a U.S. government report showed consumer prices rose less
than expected in January. []
Analysts said tame U.S. inflation may support the view that
benchmark U.S. interest rates will be low in the foreseeable
future, taking some steam out of the dollar's rally.
"That type of data reinforces the outlook for low U.S.
interest rates," said Joe Manimbo, a currency trader at
Travelex Global Business Payments in Washington.
"Consequently the dollar has pared some of its impressive
overnight gains."
Against the dollar, the euro was last 0.7 percent lower at
$1.3521 and on track for its sixth consecutive week of
declines. The dollar rose 0.9 percent to 91.99 yen <JPY=>.
"Even though this is not an official tightening, it shows
that the Fed is at least 'moving'. 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.
The dollar gained over recent weeks on the back of positive
U.S. economic data while structural problems in the euro zone
have weighed on the euro, prompting it to fall more than 5
percent against the greenback since the start of the year.
FED TIMING
While the timing of the Fed's discount rate announcement
surprised the market, Fed Chairman Ben Bernanke had said last
week the central bank could soon raise that rate. He stressed
that the move would not be akin to tightening monetary policy.
St. Louis Fed President James Bullard said investors'
belief in the high probability of a rise in the Fed's benchmark
federal funds rate this year was 'overblown' and that the
discount rate rise should not be seen as a policy signal.
Another Fed policy-maker, Dennis Lockhart, voiced a similar
view. []
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 1 percent to $0.8932 <AUD=D4> and shed 0.7
percent against the yen to 81.63 yen <AUDJPY=R>.
Sterling also remained under pressure, dropping to as low
as $1.5345 versus the dollar <GBP=D4> as the pound struggled
after weak British retail sales data. []
(Additional reporting by Wanfeng Zhou in New York and Neal
Armstrong in London; Editing by James Dalgleish)
