Sterling hit a nine-month low against the dollar on Friday as the US currency continued to gain broadly after the Federal Reserve raised its discount rate. The pound fell more than 1.5pc to $1.5377, its weakest since mid-May 2009. It also fell against the euro, which rose 0.4pc to 87.63pc, its highest in roughly a week. A strengthening dollar weakened the appeal of gold as an alternative investment, pushing the price down around 1pc. The Fed's decision to raise the interest rate it charges banks for emergency loans from 0.5pc to 0.75pc, signalled it was starting to normalise monetary policy. The move mark the first time one of the "big three" central banks has tightened policy, rather than merely mooting it, since the crisis begun. Although Mr Bernanke had flagged it as a possibility a week ago, saying that he would consider such a move "before long", the decision caught some investors by surprise, with Dow futures falling 65 points to 10,310, coming as it did after normal market hours, and unconnected to a scheduled meeting of the Federal Open Markets Committee (FOMC). The change was the first move in US interest rates since December 2008, when the Fed lowered the discount rate – the price at which banks emergency money from the Fed – to 0.5pc and lowered its main federal funds interest rate to a range of 0-0.25pc. However, since the decision will not directly affect the main Fed funds rate, it is unlikely to feed through directly to consumers. The increase widens the spread between the Federal funds and the discount rate to half a percentage point, the upshot of which will be to encourage banks to borrow from the short-term credit markets rather than using the Fed – until this decision the cheapest source of short-term funding. Aaron Kohli, strategist at RBS Securities, said: "This is more a case of normalisation, rather than a precursor to a change in monetary policy."

Source