Last week, the Federal Reserve Board announced that “in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs”, including raising the discount rate from 1/2 percent to 3/4 percent. The US dollar, which was already strong given its safe haven status and the debt crisis in Greece, rallied even further on speculation the Federal Reserve, will increase the Fed Funds earlier than investors had previously expected. The Federal Reserve is now expected to increase rates by 75 bps, according to overnight index swaps which measure interest rate expectations for the next twelve months. Eventually, a widening of the interest rate differential between the United States and other countries will help the US dollar. I have been long USDJPY and short EURUSD for quite some time. However, I suggest investors to wait a bit before going long USDJPY and short EURUSD because a short-term reversal caused by a wave of profit taking is likely to happen.
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