UK currency hit a nine-month low against the dollar on Friday as the dollar gained broadly after the Federal Reserve raised its discount rate.

Pound Sterling – UK Markets

Sterling took a fair few blows overnight and this morning plummeted to a nine-month low against the dollar when the Federal Reserve raised a key interest rate. Yesterday's public finance figures for January showed that the UK government spent GBP4bn more than it received in January for the first time since records began in 1993. Other than the threat of more bad weather, there could be further bad news for the pound today with the release of retail sales data for January anticipated to be hit by the VAT restoration to 17.5%, a month on month decline of around 0.7%.

US Dollar – US Markets

The Dollar surged in value this morning after the Federal Reserve surprised the market in yesterday’s late trading by raising a key interest rate. The Federal Reserve released a statement saying it would increase the discount rate it charges banks from 0.50% to 0.75%. Immediately after the release, the markets reacted strongly as traders bid up the greenback, which at 0914 GMT traded at GBP0.6492 and EUR0.7424. The markets reaction suggests this could be the signal for further tightening and that the Fed Funds rate may well be next. It also signifies the beginning of a long awaited withdrawal of stimulus measures to support the economy.

Euro – European Markets

The euro rose nearly half a percent against sterling today to 87.66 pence, its highest level since February 11th. Further bad news oozed out of the Euro-Zone economy yesterday. A warning from Italy's Audit Court signaled that derivative contracts used by Italian municipal governments could multiply their debts over time. This comes at a time when the EU is already facing headwinds due to the fiscal crisis in Greece. The report has garnered more attention due to swap contracts used by Greece which may hide future monetary obligations from their reported financial statements.

Other Currencies – Highlights

The Australian and New Zealand currencies fell for a third day on concern higher US borrowing costs will weaken the yield advantage of the nations’ assets. In earlier trading, Australia’s currency fell 0.3% to 89.14 US cents, and New Zealand’s dollar declined 0.4% to 69.55 US cents. Benchmark interest rates are 3.75% in Australia and 2.5% in New Zealand.