Dollar slumps and gold and silver rally after US debt deal

LONDON (Oct 17)   The US dollar dropped sharply against the British pound, euro and Japanese yen, while gold moved in the opposite direction as markets digested the news that US politicians have agreed to raise the debt ceiling, avoiding default.

Currencies were being buffeted by a number of different forces as investors considered the economic implications of the two-week government shutdown that has just been brought to an end – at least until early next year.

The US Federal Reserve is now no longer expected to start reducing the scale of its stimulus scheme this year.

'Economic data has been delayed, distorted and depressed by the shutdown...we would not expect tapering to begin until March next year with the possibility it will be delayed until June to accompany a press conference from new chair Janet Yellen,' commented Schroders' chief economist Keith Wade.

Continued stimulus keeps the dollar low and some analysts were re-evaluating their forecasts for dollar strength. 

Ratings agencies were also making gloomy noises. Dagong, a Chinese ratings agency, downgraded the US credit rating to A- from A. Standard & Poor's said the shutdown had sucked $24 billion from the US economy.

Earlier UK rate hike?

Meanwhile there was news to support the pound, which rose 0.7% against the dollar to $1.6066. The Bank of England’s chief economist Spencer Dale told the Guardian newspaper that interest rates could be hiked as early as next year.

‘Conceivably [a rate increase] could be 2014. But it would have to be in a world where you had quite strong growth, perhaps stronger than you have got now, and a recovery in productivity weaker than I would expect,’ he told the Guardian.

The pound was also supported by a better-than-expected UK retail sales report for September, with an increase of 0.6%. Alan Clarke of Scotiabank described this performance as ‘solid, if unspectacular’.

The euro was up 0.7% against the dollar to $1.3620.

Gold rallies

Gold, which tends to move in the opposite direction to the US dollar, rose nearly 2% to $1,305 per ounce. Silver was also trading up 2%, to $21.

But this rally in precious metals won't last, argued Commerzbank's Carsten Fritsch: 'Despite the ongoing uncertainty among market participants, we do not expect gold and silver prices to make any significant recovery in the short term – this is precluded by further ETF outflows'.

'Bought the rumour, sell the rally'

Of shares, Wall Street rallied strongly, but the sentiment wasn’t matched in Asia, nor in Europe this morning where a classic ‘bought the rumour, sell the news’ reaction seemed to be in place. The FTSE 100 dropped 0.3% to 6,549.