By Ben Levisohn and Anna Rascouet Feb. 19 (Bloomberg) -- The dollar and the yen gained against their major counterparts as stocks retreated after the Federal Reserve unexpectedly raised its discount rate for the first time in more than three years. The greenback gained against 14 of the 16 most-traded currencies tracked by Bloomberg, while the yen rose against 15. The dollar pared gains against the euro after a report showed the cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and energy fell for the first time since 1982. “The Fed decision yesterday to increase the discount rate has undermined sentiment for riskier assets and that’s boosted the dollar and the Japanese yen,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency exchange network. The dollar traded at $1.3514 per euro at 8:48 a.m. in New York from $1.3527 yesterday, after climbing to $1.3444, the strongest level since May 18. It is headed for a sixth week of gains against common currency. The U.S. currency was at 91.76 yen from 91.81, after reaching 92.09 yen, the highest since Jan. 12. The euro slipped to 124 yen, from 124.19. The U.S. currency earlier touched a nine-month high against the euro as policy makers yesterday boosted the rate charged to banks for direct loans in the clearest signal yet that they are ready to withdraw the unprecedented measures used to combat the financial crisis. ‘Further Normalization’ The Fed increased its discount rate to 0.75 percent from 0.50 percent and said “the typical maximum maturity for primary credit loans will be shortened to overnight” from March 18. “These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the board said in a statement yesterday. “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.” Gains in the dollar were tempered after Fed Bank of St. Louis President James Bullard said the markets’ view that borrowing costs will increase this year is “overblown.” Atlanta Fed President Dennis Lockhart said yesterday’s decision doesn’t signal a tightening of policy. “As the Fed made it clear, the discount rate hike won’t lead to an imminent rise in the federal funds rate,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., Japan’s second-largest publicly traded lender. “Gains of the dollar in the wake of the discount rate increase will lose steam sooner rather than later.” Euro Decline The euro fell on continued concern fiscal deficits in Europe’s weakest economies will worsen, diminishing the allure of the region’s assets. The 16-nation currency was poised for a second weekly loss versus the Australian dollar. Greek bonds tumbled the past two months, sending yields to the highest in 10 years, on concern the country may be unable to borrow unless it receives a pledge of financial assistance from the European Union. The government needs to raise 53 billion euros ($70 billion) this year and faces about 16 billion euros of bond redemptions by May. A political ally of German Chancellor Angela Merkel said this week that “not a single euro” should go to help Greece. “With sovereign debt risks weighing on the euro-zone and Japan, the dollar appears to have the relative advantage over the euro and the yen,” Philip Wee, senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a note. DBS, Southeast Asia’s largest bank, said today it lowered its forecasts for the euro to $1.38 from $1.51 for the first quarter and to $1.50 from $1.54 for year-end. UBS AG said the euro may “challenge $1.30 in a few weeks.” Pound’s Slide The pound declined on concern the Bank of England will be forced to continue measures to revive Britain’s economy as other central banks withdraw emergency stimulus. Retail sales excluding gasoline fell 1.2 percent in January from December, the Office for National Statistics said today in London. Economists predicted a 0.5 percent drop. “Risks have grown that the Bank of England will be left behind as other G-10 central banks begin the process of policy normalization,” Brian Kim, a currency strategist at UBS in Stamford, Connecticut, wrote in a note yesterday. “Medium-term downside risks for sterling have increased.” The yen strengthened for the first time in four days against the euro as the Fed’s discount-rate increase pushed the MSCI Asia Pacific Index of shares down 2 percent. “Worries that the Fed may take more exit steps from its extremely accommodative stance are weighing on risk sentiment,” said Takashi Kudo, general manager of market information service in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This is probably causing the yen to be bought.”

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