Dollar turns tail as gold hits record on safe-haven bid

SINGAPORE/SYDNEY – The US dollar drifted lower against the euro and other major currencies yesterday, losing its shine to a surging gold price and more dovish comments from US central bankers.

Gold rose more than one per cent to a fresh record high yesterday as concerns about accelerating inflation and weak economic growth prompted investors to seek relatively safer assets, while supply concerns boosted oil and copper.Sue Trinh, senior currency strategist at RBC Capital Markets in Sydney, said she expected dollar weakness to continue until US Thanksgiving holiday starting Thursday.’The market is probably caught long on the dollar following the move on Friday, which was a false break,’ she said.The dollar has been on a steady decline since March as signs of a global recovery prompted investors to favour higher-yield currencies and assets.It has staged a modest rebound in recent weeks, but analysts generally believe it will lose further ground in the near term due to expectations that US interest rates will remain at record low levels into 2010.Spot gold was trading around US$1 162 an ounce, having hit a peak around US$1 164, up a third so far this year.Against a basket of currencies the dollar dropped 0,5 per cent to 75,276. On Friday, the dollar index rose as high as 75,879 – its second straight daily gain – as risk tolerance declined, with investors cutting exposure to riskier assets.The euro hopped to US$1,4935, reversing an early slip to US$1,4834 and matching Friday’s high at US$1,4935.HURT BY FED COMMENTTraders said the dollar had initially tried to extend last week’s short-covering rally but ran into selling from Asian sovereign accounts just as gold streaked to a record high.It was also hit by comments from St. Louis Federal Reserve President James Bullard that the central bank should keep alive its mortgage-related assets purchase programme beyond a planned end-date to give policy-makers more flexibility.In addition, the Financial Times had an interview with Chicago Fed President Charles Evans in which he suggested interest rates would not be lifted for a long time to come, maybe late 2010 or even 2011.Those comments came in contrast to comments on Friday from European Central Bank President Jean-Claude Trichet that banks risked becoming addicted to easy money. Trichet said he would make sure that extraordinary liquidity measures would be phased out in a timely and gradual fashion.’The Fed is sounding like they mean it about keeping rates low for an extended period – way into 2010 if not 2011,’ said a trader at an Australian bank.’That just added to the dollar’s offered tone and it doesn’t take a lot of flow to move currencies when the market is so thin,’ he added, noting the absence of Tokyo for a holiday had made conditions illiquid.Trade was likely to be thin all week given US markets will be shut on Thursday for Thanksgiving, though the lack of liquidity could lead to volatile moves.The dollar was little changed on the yen at 88,90 yen , from 88,97 in New York, but remains in a gradual downtrend that stretches back four weeks now. Support was seen under 88,70, with resistance at 89,10 yen.Sterling edged up to US$1,6514 , from US$1,6502 on Friday, while the Australian dollar bounced to US$0,9180, from US$0,9153 .Minutes of the Federal Reserve’s last policy meeting are due tomorrow and could repeat the low rates message.Analysts at Barclays believe the minutes should show the Fed’s reference to resource utilisation and inflation in its policy statement was intended to underline its commitment to keeping rates low.’This language was not meant to signal that the extended period phrase would soon be removed,’ they said in a note to clients. ‘We expect the FOMC’s updated economic projections to continue to show moderate economic growth and modest inflation.’ – Nampa-Reuters