By Justin Carrigan Feb. 19 (Bloomberg) -- The dollar strengthened and stocks snapped a four-day rally after the Federal Reserve raised the discount rate, its clearest signal yet that the central bank is ready to reverse emergency stimulus. U.S. equity futures trimmed losses after consumer prices rose less than estimated. The dollar appreciated against all but two of its 16 most- traded counterparts at 9:25 a.m. in New York. The pound plunged to a nine-month low against the dollar on concern the U.K. deficit will keep growing. Futures on the Standard & Poor’s 500 Index declined 0.3 percent after earlier sliding as much as 1.2 percent. The MSCI Emerging Markets Index slid the most in two weeks. The Fed yesterday raised the rate charged to banks for direct loans by a quarter-point, the first such increase since June 2006. Policy makers around the world are weighing how to withdraw measures to aid economies, which have caused deficits to swell, without derailing the recovery. Shares in Europe pared losses, helped by Nestle SA’s forecast that sales growth will accelerate. The Fed’s decision is “a shot across the bow,” Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, said in an e-mailed note. “In the grand scheme of things, the Fed is moving back to doing business as normal.” The Dollar Index, which tracks the currency against those of six major U.S. trading partners, climbed as much as 1.2 percent, its biggest gain since Jan. 20. The pound slid against 15 of 16 of its most-traded counterparts after the U.K. yesterday unexpectedly posted a budget deficit in January for the first time since records began in 1993. CPI Trails Estimates U.S. equity futures pared earlier declines after the cost of living rose less than anticipated in January and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is not stoking inflation. The consumer-price index increased 0.2 percent, led by higher fuel costs, Labor Department figures showed. Excluding energy and food, the so-called core index unexpectedly fell 0.1 percent. “There’s no inflation for the Fed to fight,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “There was an element of nervousness going into today’s CPI figures. The CPI number came in lower-than-expected, indicating the Fed has room to keep rates low for an extended period of time. If easy monetary policy and supportive fiscal policy have helped boost equities thus far, data such as today’s CPI argues for a continuation of supportive policies.” Borrowing Costs The cost of borrowing between banks, which plunged to a record low last year as policy makers provided unlimited cash to financial institutions, may start to rise following the Fed decision, which is effective today. The TED spread, the difference between what banks and the Treasury pay to borrow for three months, widened for the first time in three days, to 15.8 basis points. Europe’s Dow Jones Stoxx 600 was little changed after earlier sliding 1 percent. Thales SA, Europe’s biggest military- electronics maker, lost 15 percent in Paris after cutting its dividend for the first time in at least a decade. Declines were limited as Nestle, the world’s largest food company, rallied 2.6 percent in Zurich after saying revenue from food and beverages will rise more than 2009’s 3.9 percent. Schlumberger Report Technip SA, Europe’s second-largest oil-services provider, rose 1.1 percent. Schlumberger Ltd., the world’s largest, is in advanced talks to buy Smith International Inc., the Wall Street Journal reported, citing people familiar with the negotiations. The MSCI Asia Pacific Index declined 2.1 percent, the biggest drop in two weeks. Li & Fung Ltd., the biggest supplier of clothes and toys to Wal-Mart Stores Inc. and Target Corp., slumped 3.6 percent in Hong Kong. The MSCI Emerging Markets Index dropped 1 percent, the biggest decline since Feb. 5. Options traders are paying the most to protect against a decline in Chinese stocks since March after the central bank ordered lenders to set aside larger reserves to help cool inflation in the fastest-growing major economy. Chinese markets were closed this week for holidays. To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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