US Dollar Rises As Feds Raise Discount Rate

Posted February 19, 2010

The US dollar generally strengthened across the board as the Federal Reserve increased the discount rate to banks for loans. The euro weakened again as Greece faces the need to raise 53 billion euros to meet debt obligations. The Canadian dollar took a step backwards against the US dollar. The Swiss franc fell against the euro as the central bank intervenes in the market again. The Columbian peso weakened as the budget deficit grows. The UK pound weakened also for the same reason.


The US dollar strengthened against the euro and at one point touched a nine month high of $1.3444. The euro has been suffering due to the debt issues in the Euro-Zone even as the US economy picks up the pace of recovery.

The US Federal Reserve surprised the markets by raising the discount rate to .75 percent. This is the rate charged to banks for loans made by the Federal Reserve. The purpose of the move was to force banks to begin depending more on the open money market for funds rather than the government. This move was expected eventually but not this early in the year.

The increase in the discount rate is the first step in the process of unwinding federal stimulus economic and monetary programs. It is interesting to note that the US is unwinding some stimulus programs even as Congress debates the implementation of a second round of stimulus spending. This sends mixed signals to the markets.

The US dollar advanced against the Japanese yen also to 92.09 at one point yesterday.

Australia’s currency weakened to 89.13 US cents.

The Greece debt problem continues. The credit-default swaps on Greece’s debt advanced as the European Union fails to come up with a financial assistance plan. Greece will have to raise 53 billion euros to meet its debt obligations this year.

Germany is adamant that Greece must find its own way out of the debt morass that is hampering the country. Many policymakers believe that helping Greece financially will only create a new set of problems because Spain and Portugal face similar problems.

The Canadian dollar weakened against the US dollar to C$1.0453. The decline was not enough to cause concern among investors. The loonie has increased by 1.3 percent this year as oil prices continue to climb. The price of oil reached $79.05 per barrel for March deliveries.

Canada’s consumer price index increased in January to 1.9 percent. Canada’s central bank has pledged to keep the benchmark interest rate at .25 percent until at least June.

The Swiss franc weakened against the euro as the central bank appears to have intervened in the market again by selling francs. The franc was at 1.4677 against the euro.

The Columbian peso advanced to 1,930.70 pesos per US dollar. Colombia, like many other nations, is facing a growing budget deficit. The country is facing a drought that is contributing to rising prices for food and other consumer goods. The inflation rate is currently estimated to be at a 4.06 percent annualized rate.

Argentina’s peso also weakened to 3.8539 pesos per US dollar.

The UK pound weakened to $1.5581 against the US dollar.  The pound also fell against the euro to 87.09 pence per euro.  The UK government is being forced to sell record amounts of debt as the budget deficit widens. With an election coming up later this year, the budget deficit will be a major point of contention between opposing parties.

The South African rand weakened to 7.6735 rands per US dollar. The nation’s policy makers have decided to not pursue inflation targets which has caused some concern. South Africa had a 24 percent unemployment rate in the fourth quarter of 2009 and only a 2.3 percent GDP expansion is expected in 2010.