Gold rose more than 2 percent in Europe on Monday as the dollar slipped to a fresh two-month low versus the euro, boosting interest in the precious metal as a currency hedge.

Gold was held below $830 an ounce for much of the day by technical resistance, but stops were triggered as the rising euro pushed prices higher, leading to a spike to a two-month high of $842.15 an ounce.

Spot gold was quoted at $840.05/842.05 an ounce at 1533 GMT, against $819.90 an ounce in New York late on Friday.

Traders are awaiting an announcement on interest rates from the U.S. Federal Reserve on Tuesday, which will have a significant impact on the foreign exchange market, and consequently on gold.

“On the currency side, the high yield has been dragging euro higher,” said Pradeep Unni, a senior analyst at Richcomm Global Services.

“If the Fed slashes rates again, the yield differentials between the euro zone and Fed would widen further.” The dollar slipped against both the yen and the euro, striking a two-month low against the single currency as traders continued to exit long dollar positions, spooked by uncertainty over the fate of U.S. automakers.

Gold tends to track the euro/dollar exchange rate closely, as it is often bought as an alternative investment to the U.S. currency and tends to move in the opposite direction to it.

The Federal Reserve is widely seen cutting rates by at least 50 basis points on Tuesday after the Federal Open Market Committee’s two-day policy meeting concludes.

“Everyone is banking on a lower interest rate in the U.S.,” said Afshin Nabavi, head of trading at MKS Finance in Geneva. “If the dollar continues to lose value, of course it will benefit gold.”

Oil, the other key external driver of gold, rose nearly 7 percent to $50 a barrel in afternoon trade. Crude prices have been boosted by expectations for a cut in OPEC production later this week.

EQUITIES SLIP

However, equity markets have shed gains, with European shares turning negative in the early afternoon after a lower opening on Wall Street.

U.S. stocks retreated as shares of big-cap tech companies declined while uncertainty over the fate of a possible rescue plan for ailing carmakers also weighed.

Among other precious metals, spot silver tracked gold higher to $10.51/10.59 an ounce, against $10.23 in New York late on Friday.

The platinum group metals benefited from hopes for a bail-out of the U.S. automotive industry. Carmakers are major buyers of PGMs and weakness in the sector has pushed prices sharply lower in recent months.

Major platinum producer Aquarius Platinum said on Monday it will keep its Everest mine in South Africa closed for at least six months.

“A six-month closure would result in 38,000 ounces of lost platinum output and 19,000 ounces of lost palladium output, less than 1 percent of global production of both metals,” said Barclays Capital.

“However, for now the market focus remains firmly centered on demand weakness, which is likely to expose prices to downside risk,” it added.

Spot platinum climbed to $833.50/853.50 an ounce from $805.50 an ounce, while palladium surged to a high of $178, before easing to $173.50/181.50 an ounce, up from $168 late on Friday.

Dollar weakens to two-month low versus euro… Oil climbs nearly 7 percent; OPEC supply cut expected

Jan Harvey
LONDON, Dec 15 (Reuters)

The dollar slipped to a two-week low against the euro while the yen fell broadly on Wednesday as a tentative agreement by U.S. lawmakers to rescue American automakers helped calm investor sentiment.

The White House and congressional Democrats reached a deal in principle on a $15 billion plan to bail out and restructure auto firms, with officials saying the House of Representatives could vote on it as early as Wednesday.

“The market is still feeding off hopes for mass fiscal stimulus in the U.S. once (President-elect Barack) Obama takes office,” said Stephen Malyon, chief currency strategist at Scotia Capital in Toronto.

Specific to the auto bailout, “in so far as how it is boosting equities, that is important for the foreign exchange market.”

U.S. stock futures rose on Wednesday, a sign of rising risk tolerance, due to bailout hopes. That led to an easing of the move to unwind carry trades, which use the yen — whose interest rate is near zero — to fund purchases of higher-yielding assets.

In early New York trade, the euro edged up 0.3 percent to $1.2948, having earlier hit a two-week high of $1.3004, according to Reuters data.

The dollar rose 0.7 percent to 92.78 yen , while the euro gained 1.1 percent to 120.28 yen. The yen was down 1.2 percent against the Canadian dollar , 0.7 percent against the Swiss franc and 1.1 percent against the pound , according to Reuters data.

Analysts said fears of Bank of Japan intervention to prevent too much yen strength also weighed on the currency after BoJ Governor Masaaki Shirakawa said on Wednesday he was watching forex moves carefully.

But few expected action any time soon.

“A comment from BoJ Governor Shirakawa that the Ministry of Finance has the option of intervening was a statement of fact to lawmakers rather than a hint that intervention is imminent,” said Brown Brothers Harriman in a note to clients.

Analysts said trading in recent days is less active than usual with little economic data to drive market moves and investors beginning to wind down for the year-end holidays.

“We’re seeing subdued days in foreign exchange markets,” said Scotia’s Malyon. “We are also in a week where there is not a lot of direction.”

US BAILOUT IN FOCUS

Analysts believe the falls in the yen are likely to be short-lived as global recession fears keep risk aversion high.

The prospect of interest rates in other developed countries falling towards the low rates in Japan will also keep the Japanese currency supported, they said.

Traders waited to see whether the House of Representatives would approve the automaker bailout, which includes conditions to provide low-interest loans to avert a threatened industry collapse if one of the three U.S. auto firms were to fail.

Some market participants are sceptical on whether such a plan, if passed, would actually save the struggling auto sector, while others argue that it would ultimately do little to cure the global recession.

“The market may yet reach a stage where interest in risk assets cannot be justified by the underlying conditions in the global economy,” analysts at UBS said in a research note.

Nick Olivari
NEW YORK, Dec 10 (Reuters)

Is it sustainable, though? “The major force in the capital markets, especially in the foreign exchange market, is the deleveraging process,” Chandler said. “And the deleveraging process is one in which they [investors] have to buy the dollar they previously sold.”

The buck held up despite data showing that U.S. manufacturing firms experienced the worst level of output in 26 years. The Institute for Supply Management said its factory index fell to 38.9%, the lowest since 1982, from 43.5% in September. That was far below conomists’ expectations that the index would decline to 41.5%.

But then, the news from across the pond isn’t any better. The closely-watched Markit purchasing managers index for the euro-zone manufacturing sector fell to 41.1 from 45.0 in September. A figure of less than 50 indicates a contraction in activity.

In response, the European Central Bank is widely expected to cut its key lending rate, now at 3.75%, when its governing council meets on Thursday. In addition, the Bank of England is expected to cut its key lending rate by at least a half-point to 4%, also on Thursday, with some even predicting an unprecedented cut of a full percentage point to 3.5%.

Source: Dollar holds gains despite grim manufacturing data -  But the numbers from the eurozone are equally bad

Dollar apologists could not have been pleased with the currency’s performance after a little good news. The Commerce Department reported that retail sales showed some improvement in March, rising 0.2%. Economists had been predicting a 0.1% decline.

Commerce also reported that inventories rose 0.6% in February, with gains in all three subcategories: the retail, factory and wholesale sectors. As inventory builds surprise to the upside, that may be enough to keep first quarter growth above zero, said economists at Lehman Brothers.

The G7 finance ministers issued their usual communiqué after meeting over the weekend, and French Finance Minister Christine Lagarde said yesterday that the foreign exchange market doesn’t fully understand the magnitude of their language shift on currencies.

“I’m not surprised [if] it will take a few more hours” for the meaning to sink in, Lagarde said. “For the first time since 2000, we are collectively expressing concern. We all together believe the level of volatility and the discrepancy between where a currency lies relative to the fundamentals of the economy are just not right at the moment.”

Pressed on whether the G7 would be concerned if the dollar moved even slowly lower versus the euro, Lagarde replied, “Yes.”