Dollar rises on surprise Federal Reserve move

The dollar has risen against a basket of currencies after the US Federal Reserve's surprise increase in interest rates for emergency bank loans.

The US central bank said late on Thursday that it was lifting its discount rate to 0.75%, from 0.5%.

Analysts saw the move as a sign that the Fed could soon raise its other key lending rate.

The dollar hit a nine-month high against the euro of $1.3477 before falling back to $1.3574.

US stocks fell in early trading as investors feared any further rate rises could slow the economic recovery.

However, inflation figures also released on Friday showed only a small increase in consumer prices.

This calmed fears that interest rates could soon rise, and stocks bounced.

The main Dow Jones index closed up 9.5 points at 10,402.35. European markets closed up slightly.

'Further normalisation'

The Fed cited "continued improvement in financial market conditions" as the reason for its move.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalisation of the Federal Reserve's lending facilities," the Fed said in a statement.

Against the yen, the dollar rose to its highest level in a month at 92.10 yen, before weakening slightly to 91.9 yen, while the UK pound was trading at $1.5456.

"Even though this is not an official tightening, it shows that the Fed is at least 'moving'," said Antje Praefcke, currency strategist at Commerzbank.

As well as the discount rate, the Fed also sets the federal funds rate - the benchmark rate at which banks lend to each other and is used to set rates on mortgages and car loans.

The Fed's decision is the first unexpected change to either of its key rates since the height of the financial crisis last year.

Stock falls

The Fed's move took stock markets by surprise, with Asian markets seeing large falls overnight.

Japan's benchmark Nikkei 225 index fell 2% to 10,123.58, while Hong Kong's Hang Seng fell 2.6% to 19,894.

"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said.

It did not change its funds rate - which remains at a target of between zero and 0.25%.

However, despite the Fed's assurances, the move raised concerns that an increase in its funds rate may soon follow, as its two key rates have usually moved in tandem.

"The Fed can talk all day about how the discount rate hike is technical and not a policy move, but the market sees it as a shot across the bow," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

The Fed also raised the minimum bid on a special programme to boost short-term lending to 0.5%, from 0.25%.