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US Fed trims US$10bn off its stimulus

January 31, 2014

The move leads to a brief stumble in US markets, has muted impact on lira/dollar exchange rates ANKARA The U.S. Federal Reserve cut US$10 billion in its $75 billion -worth of monthly bond purchases, due to "cumulative progress" in the US economy. "In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, (Fed) has decided to make a further measured reduction in the pace of its asset purchases," the statement said. US markets briefly stumbled after Fed's announcement, with Dow Jones industrial average falling just over one percent in two hours. The announcement came after Ben Bernanke's last meeting as Fed chair. He will hand over his position at the end of this month to Janet Yellen, the first woman to lead the central bank. Fed's move to taper its bond purchases follows a similar decision in December, when it announced its first reduction - $10bn - in years. The move has so far had a muted impact on dollar/lira exchange rates, leading to a slight upward twist to 2.26 from 2.245 before the announcement. Turkey's Central Bank (CB) introduced a significant rise in its interest rates on Tuesday to prevent the Turkish currency from falling further against the dollar, which had recorded successive all-time highs over the lira in the last ten days. After Turkey's move, South Africa's Central Bank also raised its interest rates on Wednesday. The U.S. Fed's economic stimulus program provides cheap dollars to developing economies, making it easier to balance their current deficits. Before the Turkish CB decided to boost interest rates by nearly five percent, it announced on January 23 it would make a direct intervention in the foreigh exchange market - its first in two years. The Central Bank has spent 3 billion dollars of foreign exchange reserves to stem the dollar's rise since late December. Economists warned last week that selling dollars might not be adequate to offset the rise. Prime Minister Recep Tayyip Erdogan said earlier on Tuesday he was opposed to the idea of raising interest rates. The Central Bank in Turkey enjoys a degree of independence. The rising rates seems to have helped steady the dollars upward trend, but it has the risk of affecting growth in the developing Turkish economy, which is expected to have grown around four percent last year. The 4.4 percent growth figure in the third quarter of 2013 marks the 16th successive quarterly growth.

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Source: Anadolu Agency (Turkey)

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