Gold falls on Fed rate hike, dollar surge

[SINGAPORE] Gold slipped on Thursday to give back some of its overnight gains, with trading choppy as the dollar surged after the Federal Reserve hiked US interest rates for the first time in nearly a decade.

The US central bank raised the range of its benchmark interest rate by a quarter of a per centage point on Wednesday, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

Gold has slumped nearly 10 per cent this year, largely on uncertainty around the timing of the rate rise and on fears that higher rates would hit demand for the non-interest-paying metal. It had fallen to a near-six-year low earlier this month.

Spot gold had dipped 0.5 per cent to US$1,066.80 an ounce by 0326 GMT. The metal had rallied before the Fed decision on Wednesday and managed to hold most of those gains after the central bank statement, ending the day up 1.2 per cent.

US gold fell 1 per cent to a session low of US$1,064.20, following a 1.4-per cent gain in the previous session.

"This morning, it is more of a dollar story," said a Hong Kong-based precious metals trader.

"The market pretty much expected the comments we heard from the Fed," the trader said, adding that the most-likely move for gold was to go lower.

The dollar index, which measures its strength against a basket of six major currencies, rose 1 per cent on Thursday. A robust dollar makes greenback-denominated gold more expensive for holders of other currencies.

Asian stock markets jumped as investors chose to take the historic hike in US rates as a mark of confidence in the world's largest economy, reducing gold's safe-haven appeal.

With the much anticipated first rate hike out of the way, the focus now shifts to the pace of future rate increases.

The US central bank made clear the rate hike was a tentative beginning to a "gradual" tightening cycle.

But the rate forecasts, or dot points, from Fed members were a little higher than many expected with 100 basis points of hikes pencilled in for next year and a terminal rate of 3.5 per cent.

The divergence between the Fed forecasts and the market could hurt gold prices as investors begin to align their views with the central bank.

"Gold has been extraordinarily sensitive to perceived changes in monetary policy for many months," said HSBC analyst James Steel. "The rate rise may finally clear the deck and remove rate-related uncertainty from the bullion market." The Fed action leaves gold positioned for some modest gains, largely from short-covering, but much of the impact on bullion will come from the dollar move, he said.

REUTERS