The dollar strengthened and stocks snapped a four-day rally after the US Federal Reserve raised the discount rate, its clearest signal yet that the central bank is ready to reverse emergency stimulus.
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 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."
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