EUR/USD rallies after falling to 7-month low, as rate hike intensifies

Investing.com -- EUR/USD fell to fresh seven-month lows on Monday before paring the losses late in the session, as the Federal Reserve rattled markets by holding an unscheduled meeting to discuss the possibility of raising a key rate charged to commercial banks on loans.

The currency pair traded in a broad range between 1.0593 and 1.0657 before settling at 1.0636, down 0.0010 or 0.09% on the session. On Monday morning, the euro fell below 1.06 for the first time since mid-April. The euro has now closed lower against its American counterpart in six of the last eight sessions. Over the last month of trading, EUR/USD has fallen by roughly 4.25% in value.

EUR/USD likely gained support at 1.0519, the low from April 13 and was met with resistance at 1.1352, the high from Oct. 22.

On Monday morning, the Federal Reserve Board of Governors scheduled a closed-door meeting, held under expedited procedures, to review the discount rates charged by its regional banks. The discount rate is the interest rate charged to commercial banks on loans they receive from their regional Federal Reserve Bank lending facilities, also known as the discount window. When the Fed increases the discount rate, it makes the borrowing costs for banks more expensive, decreasing the money supply in the system.

The discount rate differs from the Federal Funds Rate, which is the rate banks lend to one another on overnight loans for funds maintained at the Federal Reserve. In February, 2010, the Fed increased the spread between the discount rate and the top of the target range of the Federal Funds Rate to 50 basis points. It came nearly two years after the Fed reduced the spread to 25 points in March, 2008, in an effort to bolster liquidity.

The Federal Funds Rate has remained at a level between zero and 0.25% for nearly seven years, since December, 2008. The announcement of the previously unscheduled meeting helps raise speculation that the U.S. central bank will lift the Fed Funds Rate when it meets next on Dec. 15-16. The Fed last held an unscheduled in December, 2012. A rate hike is viewed as bullish for the dollar, as foreign investors pile into the greenback in an effort to capitalize on higher yields.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, rose more than 0.30% to an intraday high of 100.05. It marked the first time the index spiked above 100 since March 18. The index closed at 99.76, up 0.02% on the session.

Yields on the U.S. 10-Year fell two basis points to 2.74%, while yields on the Germany 10-Year jumped five basis points to 0.53%.

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