Overview: Gold rises as dollar falls

Gold spearheaded a surge in global commodity prices on Monday against a backdrop of mounting concerns about the US economy, talk of aggressive interest rate cuts by the Federal Reserve and steep losses for the dollar.

Gold rose as high as $914 before easing back, and was above $900 late in New York. There was a bullish tone to the rest of the precious metals complex, with platinum hitting a fresh record high and silver touching a 27-year peak.

However, John Reade, precious metals analyst at UBS, said: "It is clear that there are very large speculative positions present in gold and that gold is vulnerable to a sharp correction in price at any time."

Oil prices snapped a three-day losing streak in spite of worries that a US economic slowdown could hurt demand. February West Texas Intermediate, the US benchmark crude price, climbed $1.51 to $94.20.

Agricultural commodities also had a strong session, with corn, wheat and soyabeans all continuing to benefit from last week's US Department of Agriculture crop report.

On the currency markets, the dollar fell to its lowest-ever level against the Swiss franc and seven-week lows against the euro and the yen as investors increasingly moved to price in a 75 basis point cut in US interest rates at the end of this month.

There was also much talk that the Federal Reserve could move before its policy meeting on January 30.

Ashraf Laidi, chief FX analyst at CMC Global Markets, noted that a string of key US economic indicators were due out this week, including retail sales, industrial production figures and the Philadelphia Fed index of manufacturing activity.

"A dismal showing in these indicators coupled with continued selling in US equities will likely prompt the Fed into cutting rates as early as this week," Mr Laidi said.

"With US equity indices testing their August lows and current macroeconomic dynamics knocking at the door of recession, we place the probability of a 50 basis point inter-meeting rate cut as high as 70 per cent."

Interbank dollar rates fell sharply as investors focused on the possibility of aggressive Fed easing. The three-month dollar Libor rate fell 20bp - the most since September 19, the day after the US central bank cut its key funds rate 50bp.

US and European equity markets managed tentative rebounds on Monday as encouraging quarterly earnings from IBM kickstarted a crucial week of corporate results.

Of most interest to investors will be figures from some of Wall Street's biggest investment banks, including Citigroup and Merrill Lynch, amid concerns that there might be further writedowns related to subprime mortgages.

Julian Jessop, at Capital Economics, said this might not necessarily be a cause for alarm.

He said that even if writedowns far exceeded current estimates, it would at least remove some of the uncertainty about banks' exposures.

Mr Jessop said that with new management now in place in many US banks, there was a stronger incentive to get as much bad news out as early as possible.

He added: "Nonetheless, we remain concerned that the consensus is under estimating the impact of the economic slowdown on US corporate earnings of all types."

Late in New York, the Dow Jones Industrial Average had closed up 1.4 per cent, the S&P 500 rose 1.2 per cent, while the Nasdaq Composite gained 1.6 per cent.

Last week, the benchmark indices fell to their lowest levels since August.

In Europe, the FTSE Eurofirst 300 index edged up 0.2 per cent from a 13-month low struck on Friday, while the FTSE 100 in London also gained 0.2 per cent.

Asian markets remained under pressure from concerns about the impact of a US slowdown on leading exporters.

Hong Kong fell 1.5 per cent and Singapore 2.1 per cent, although Taipei climbed 1.8 per cent after victory for the country's pro-China opposition party in parliamentary elections over the weekend. Japanese markets were closed for a holiday.

Short-dated US government bonds remained supported by the prospect of further Fed easing.

The yield on the rate-sensitive two-year Treasury touched a three-year low of 2.52 per cent before pulling back to 2.56 per cent, down 2bp on the day.