* Dollar up broadly in aftermath of Fed discount rate hike
* Euro near 9-month lows, dollar rises 1 pct vs yen (Recasts, updates prices)
NEW YORK, Feb 19 (Reuters) - The dollar climbed across theboard on Friday, touching an eight-month high against acurrency basket, a day after the Federal Reserve raised theinterest rate it charges banks for emergency loans.
The Fed announced late on Thursday that it raised thediscount rate to 0.75 percent from 0.50 percent, although itleft the benchmark federal funds rate, its main policy tool,unchanged near zero. For more see [ID:nSGE61I036].
Currency markets took the decision as a signal the U.S.central bank was coming closer to tightening its benchmark ratedespite assurances from Fed policymakers to the contrary.
The move triggered a rally in the greenback as higher ratesincrease the return on dollar-denominated assets.
"The markets are taking this as a clear step towardsnormalization in monetary policy," said Meg Browne, a currencystrategist at Brown Brothers Harriman in New York. "If youcombine the Fed actions with the fundamentals of the U.S.economy and contrast it with the situation in Europe, dollarbuying is more than justified."
In late afternoon trading in New York, the dollar was up0.3 percent in a calculated measure against a basket ofcurrencies at 80.633 .DXY after rallying to an eight-monthhigh of 81.342, according to Reuters data.
The euro EUR= traded as low as $1.3444 according toReuters data, its lowest in nine months.
The euro zone common currency recovered some of its lossesafter a U.S. government report showed consumer prices rose lessthan expected in January. [ID:nN18218950]
Analysts said tame U.S. inflation may support the view thatbenchmark U.S. rates will stay low for the foreseeable future.
"That type of data reinforces the outlook for low U.S.interest rates," said Joe Manimbo, a currency trader atTravelex Global Business Payments in Washington. "Consequentlythe dollar has pared some of its impressive overnight gains."
Against the dollar, the euro was last 0.2 percent lower at$1.3593, still on track for its sixth consecutive week ofdeclines although it was off the session low.
Against the yen the dollar rose 0.4 percent to 91.62 yenJPY=.
"Even though this is not an official tightening, it showsthat the Fed is at least "moving."
The Bank of Japan may require more quantitative easing andthe ECB cannot change its stance, so the dollar can rallyfurther against the yen and the euro," said Antje Praefcke,currency strategist at Commerzbank.
The dollar gained over recent weeks on the back of positiveU.S. economic data while structural problems in the euro zonehave weighed on the euro, driving it down more than 5 percentagainst the greenback since the start of the year.
FED TIMING
While the timing of the Fed"s discount rate announcementsurprised the market, Fed Chairman Ben Bernanke had said lastweek the central bank could soon raise that rate. He stressedthat the move would not be akin to tightening monetary policy.
St. Louis Fed President James Bullard on Thursday saidinvestors" belief in the high probability of a rise in the fedfunds rate this year was "overblown" and that the rise in thediscount rate should not be seen as a policy signal.
Dennis Lockhart, the president of the Atlanta Fed, voiced asimilar view on Thursday evening. [ID:nN18242630]
The Australian dollar slipped despite hints by Reserve Bankof Australia Governor Glenn Stevens that further interest raterises were likely [ID:nSGE61H03Z]. The Australian currency fell0.4 percent to $0.8982 AUD=.
Sterling also remained under pressure, last down 1.1percent at $1.5455 GBP= as the pound struggled after weakBritish retail sales data. [ID:nONS004813] (Reporting by Nick Olivari, Vivianne Rodrigues and WanfengZhou; Editing by James Dalgleish)
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