Dollar Gains Drag on Gold

July 5, 2012 at 15:10

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Gold futures slipped, wilting under pressure of a higher U.S. dollar as investors flocked to the currency after the European Central Bank announced interest-rate cuts.

The most actively traded gold contract, for August delivery, was recently down $22.80, or 1.4%, at $1,599 a troy ounce on the Comex division of the New York Mercantile Exchange.

Gold had gained earlier this week in anticipation that world central banks would ease monetary policy in an effort to steady the financial system after global growth slowed. Some investors turn to precious metals as hedges against the inflation that can result from such policies.

But there were few surprises from the European Central Bank in its rate cuts announced on Thursday, and gold sold off as traders flocked to the dollar.

“The (gold) market had priced the moves in” said Frank McGhee, head precious metals dealer with Integrated Brokerage Services. “The interest-rate cut is weakening the euro. That re-creates the race of who can run their currency down the fastest.”

With the Bank of England and China’s central bank also announcing monetary easing steps on Thursday, the U.S. dollar seemed to be losing that race.

The ICE U.S. Dollar Index, which tracks the dollar against currencies of some major U.S. trading partners, jumped to a one-week high on Thursday as the easing steps elsewhere raised the prospect that those currencies would weaken. Gold can move inversely to the dollar, as a rise in the dollar makes dollar-denominated gold appear more expensive for buyers using other currencies.