NEW YORK (Dispatches) - Gold dropped sharply and the dollar rose Thursday after the Federal Reserve signaled it may raise interest rates sooner than expected.
Gold futures declined 4.5%, the largest drop in over 10 months. That took gold down to $1,777.80 a troy ounce, its lowest since early May.
The WSJ Dollar Index, which tracks the currency against a basket of others, advanced 0.3%. That added to its 0.8% gain, which was its biggest one-day gain since March 2020. Against the euro, the dollar rose another 0.5% Thursday, putting at about $1.19 per euro.
Fed Chairman Jerome Powell said the higher inflation recorded this year should be temporary, but the risks that it would persist couldn’t be ignored. Some members of the rate-setting committee brought forward their expectations of when rates might have to rise.
Higher interest rates in the U.S. make investing in American bonds more attractive to foreigners, and can increase demand for the dollar from overseas. Treasury yields rallied their most in three months after the Fed’s disclosures Wednesday, helping bolster appetite for the dollar. Those higher yields also make gold less attractive as an investment because it produces no income.
Crude oil is down more than 1% on Thursday afternoon, with WTI falling 1.32% at $71.20 per barrel, and Brent down 1.57% to $73.22. Both prices are still up on the week, but down nearly $2 from Wednesday highs.
Jerome Powell on Wednesday afternoon said that rising inflation is most transitory, but suggested there is also a risk that inflation may prove to be more persistent than the Feds expected. The Federal Reserve said that it may lift rates as early as in 2023—a year earlier than previously expected.
The ICE U.S. Dollar Index (DXY)—a measure of the dollar against a basket of six rivals--was up 0.9% at 3:43pm EDT.
That strong dollar played a big part in sending oil prices down. With commodities prices in the dollar now more pricey for those with other currencies.
WTI prices have soared over the last month, climbing from $61.94 on May 20 to $71.14 for the July contract.
Strong oil demand and lower U.S. crude oil inventories, however, are capping today’s loss in price. The API this week projected that crude oil inventories had fallen by 8.537 million barrels; with the EIA estimating that the loss was 7.4 million barrels.