Market info

Dollar turns mixed

19 Feb  - Fundamental 

The dollar turned mixed Friday afternoon, with the euro recovering from steep losses, as U.S. stocks gained and traders continued to mull the Federal Reserve's decision to raise its discount lending rate.

What prices are doing: The dollar fell 0.6% against the euro to $1.3609, after climbing to a nine-month high earlier in the day. But it gained 0.4% against the British pound at $1.5465. Against the Japanese yen, the dollar fell 0.3% to ¥91.82

The dollar index (DXY), which measures the greenback against a basket of major rival currencies, rose 0.2% to 80.54.

What's moving the market: The dollar rallied throughout the morning on expectations that the Federal Reserve could move to tighten monetary policy sooner than expected.

But the euro recovered in the afternoon as traders gravitated towards higher yielding assets. Stocks ended a choppy session higher, marking the fourth straight day of gains.

Some analysts said the euro's rebound was due to a «short squeeze,» which occurs when traders rush to unwind bets that a currency will fall.

«The price action in the forex markets is clearly indicative of a short squeeze,» said Kathy Lien, director of currency research at trading firm GFT. «The recovery in the euro poses little threat to the dollar's rally because fundamentally, the Eurozone is in worse shape than the U.S.»

Meanwhile, investors continue to digest the Fed's decision to increase its discount rate, which is what banks pay to borrow directly from the Fed, to 0.75% Thursday.

The increase is not expected to impact the price of consumer loans — such as mortgages and credit card rates — because the discount rate is what the Fed charges banks for emergency short-term borrowing.

The Fed left its benchmark lending rate, which has a bigger impact on the price of consumer loans, near zero. And given the sluggish labor market and tepid economic recovery, the closely watched rate will remain near its historic low for the foreseeable future.

Still, the increase in the discount rate is a small sign that the Fed thinks the market can begin to stand on its own. That confidence helped boost the dollar earlier in the day.

What analysts are saying: «Although the Fed went out of their way to say that this does not equate to a change in their monetary policy outlook, action speaks louder than words,» Lien said. «Their decision to begin normalizing rates before the next central bank meeting indicates how hawkish they must be and how serious they are about tightening monetary policy.»

Lien added that that the rate hike is a «game changer for the foreign exchange market» and will boost the dollar because it signals that the Fed is beginning to implement an exit strategy, which is not the case for other central banks.

Though the Fed's action and strong U.S. economic data will continue to make the dollar a more attractive investment, Lien said the buck will also gain ground as investors focus on Europe's debt crisis.

«At the end of the day, the U.S. dollar is still a safe haven currency, which means that as long as investors remain nervous, the dollar should hold onto its gains.»

© CNNMoney.com