London: Gold eased in Europe on Friday as the dollar surged to nine-month highs versus the euro, but erased much of its earlier decline as investors bought the precious metal to hedge against financial market risk.
Spot gold was bid at $1,107.45 an ounce at 1032 GMT, down from $1,111.40 late in New York on Thursday but well off an earlier low of $1,098.55.
The metal was sharply lower in Asia but met buying interest in early European trade amid fears over instability in the currency markets. The euro is suffering from dollar strength and concern over the fiscal health of smaller euro zone economies.
“Gold is benefiting firstly from its value as a defensive investment, and secondly from the marked improvement in the technical picture, which emerged at the start of the week,” said Mitsubishi precious metals strategist Tom Kendall.
US gold futures for April delivery on the COMEX division of the New York Mercantile Exchange eased $7.70 to $1,110.30 an ounce.
Gold is under pressure from dollar strength, which cuts gold’s appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.
The US unit hit its highest since mid-June 2009 against a currency basket on Friday, extending gains after the Federal Reserve’s surprise decision to raise its discount rate, its first hike in the rate since mid-2006.
In its first interest rate move since December 2008, the Fed lifted the emergency lending rate it charges banks to 0.75% from 0.5%, but insisted borrowing costs would not rise for consumers or companies.
“This development...is near-term gold-bearish, as it reduces liquidity,” said HSBC analyst Jim Steel in a note. “Highly accommodative monetary policies have been an important element in the gold rally.”
He noted, however, the Fed’s assertion that the change was not expected to lead to tighter financial conditions or lead to a change in the outlook for monetary policy.
“If this implies monetary policy will remain lax, then the sell-off may be brief,” he said.
On the wider markets, European shares snapped a four-day winning streak to fall as banks suffered after the Fed announcement, while world stocks declined.
Among other commodities, oil prices were down $1 a barrel in the wake of the Fed move, which stirred fears that monetary tightening could slow demand growth in the world’s largest oil consumer and stem investment flows into commodities.
Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation. Industrial metals prices also slipped.
Physical demand for the precious metal was relatively lacklustre, with holdings of the world’s largest gold-backed exchange-traded fund, New York’s SPDR Gold Trust, unchanged for a second session on Thursday.
Meanwhile buying in India, the world’s biggest gold consumer, slackened. “Caution typically sets in after a big fall,” said one Mumbai-based gold dealer.
Among other precious metals, silver was at $15.92 an ounce against $15.84, platinum at $1,500.50 an ounce against $1,514, and palladium at $425 against $429.50.
“Both (platinum group) metals are trading lower this morning as a result of the Fed news and will continue to monitor currency moves for short-term direction,” said James Moore, an analyst at TheBullionDesk.com, in a note.