* 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 the board on Friday, touching an eight-month high against a currency basket, a day after the Federal Reserve raised the interest rate it charges banks for emergency loans.
The Fed announced late on Thursday that it raised the discount rate to 0.75 percent from 0.50 percent, although it left 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 rate despite assurances from Fed policymakers to the contrary.
The move triggered a rally in the greenback as higher rates increase the return on dollar-denominated assets.
"The markets are taking this as a clear step towards normalization in monetary policy," said Meg Browne, a currency strategist at Brown Brothers Harriman in New York. "If you combine the Fed actions with the fundamentals of the U.S. economy and contrast it with the situation in Europe, dollar buying is more than justified."
In late afternoon trading in New York, the dollar was up 0.3 percent in a calculated measure against a basket of currencies at 80.633 <.DXY> after rallying to an eight-month high of 81.342, according to Reuters data.
The euro <EUR=> traded as low as $1.3444 according to Reuters data, its lowest in nine months.
The euro zone common currency recovered some of its losses after a U.S. government report showed consumer prices rose less than expected in January. [ID:nN18218950]
Analysts said tame U.S. inflation may support the view that benchmark 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 at Travelex Global Business Payments in Washington. "Consequently the 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 of declines although it was off the session low.
Against the yen the dollar rose 0.4 percent to 91.62 yen <JPY=>.
"Even though this is not an official tightening, it shows that the Fed is at least 'moving.'
The Bank of Japan may require more quantitative easing and the ECB cannot change its stance, so the dollar can rally further against the yen and the euro," said Antje Praefcke, currency strategist at Commerzbank.
The dollar gained over recent weeks on the back of positive U.S. economic data while structural problems in the euro zone have weighed on the euro, driving it down more than 5 percent against the greenback since the start of the year.
While the timing of the Fed's discount rate announcement surprised the market, Fed Chairman Ben Bernanke had said last week the central bank could soon raise that rate. He stressed that the move would not be akin to tightening monetary policy.
St. Louis Fed President James Bullard on Thursday said investors' belief in the high probability of a rise in the fed funds rate this year was "overblown" and that the rise in the discount rate should not be seen as a policy signal.
Dennis Lockhart, the president of the Atlanta Fed, voiced a similar view on Thursday evening. [ID:nN18242630]
The Australian dollar slipped despite hints by Reserve Bank of Australia Governor Glenn Stevens that further interest rate rises were likely [ID:nSGE61H03Z]. The Australian currency fell 0.4 percent to $0.8982 <AUD=>.
Sterling also remained under pressure, last down 1.1 percent at $1.5455 <GBP=> as the pound struggled after weak British retail sales data. [ID:nONS004813] (Reporting by Nick Olivari, Vivianne Rodrigues and Wanfeng Zhou; Editing by James Dalgleish)