LONDON - The dollar slumped to its lowest in almost a year against a basket of major currencies on Tuesday as gold rallied above $1,000, with traders citing talk of reserve diversification into gold undermining the U.S. currency.
Renewed concern over the dollar’s long-term status as the world’s reserve currency sparked by a United Nations agency report on Monday and options-related euro buying also fuelled the broad-based dollar selling.
The euro broke above a big reported options barrier at $1.4450, while gold’s jump to its highest since March 2008 soured general sentiment toward the dollar.
“Often when gold rallies, the dollar sells off. People worry that when gold goes up, is it diversification away from the dollar?” said Maurice Pomery, managing director at Strategic Alpha in London.
“Market sentiment is driving this, and the sentiment is strongly dollar-negative,” he said.
The dollar index, a gauge of the greenback’s performance against six major currencies, fell over one percent on the day to 77.14, its lowest since September 30, 2008.
The euro rose as high as $1.4493, according to Reuters charts, up more than 1 percent on the day against the dollar and at its strongest in a month. It was fetching $1.4487 by 1133 GMT.
Against the yen, the dollar dipped 0.8 percent from late Monday trade to 92.15 yen.
Gold jumped more than 1 percent to $1,007.45 an ounce. Some in the market cited persisent talk this week that China could be diversifying a small part of its huge $2 trillion reserve stockpile into gold.
Some market participants said surging gold prices might encourage another wave of speculative dollar selling, with Bank of Tokyo Mitsubishi UFJ analyst Derek Halpenny noting the daily correlation coefficient between gold and euro/dollar was 0.77 over the last six months and 0.70 over the last three months.
A reading of plus 1 is the highest possible for a positive correlation, while a minus 1 reading reflects the strongest negative correlation.
“With dollar sentiment still poor, the market will not need much encouragement to increase speculative selling of the dollar,” Halpenny said in a note.
Key levels breached
European shares rose for a third straight session, with the pan-European FTSEurofirst 300 index edging close to recent 11-month peaks on the back of gold’s rise and crude trading over $69 a barrel.
Rising gold and share prices helped hoist the Australian and New Zealand dollars to their strongest levels in a year against the U.S. dollar.
The Aussie rose as high as $0.8634, its highest since August 2008. Data also showed Australia’s business confidence hit a six-year high in August, adding to mounting speculation that local rates will rise in coming months, providing overall support to the Aussie.
The kiwi rose to a new one-year high of $0.6944, extending the previous session’s gains.
“A combination of a pick-up in industrial activity being cemented and talk of reserve diversification into gold is keeping the dollar on the back foot,” said Chris Turner, head of FX strategy at ING.
“There is more evidence of industrial activity picking up, from German data on Monday and UK data today. That means re-stocking in Q3 which is good for commodities and commodity currencies.”
With currencies and gold hitting those key levels, currency market participants were now waiting for U.S. markets to reopen after Monday’s holiday for clues on whether the rally in riskier currencies will be sustained.
