Dollar and oil hit new records

By Michael Mackenzie in New York

Published: October 29 2007 20:20

Oil hit a new record high of $93.80 and the dollar struck a new low on Monday as investors showed their growing certainty that the US Federal Reserve will cut interest rates on Wednesday.

The same conviction also saw gold approach $800 a troy ounce – its highest level for 28 years – while equities made gains. The move into gold reflects how investors fear rising inflation from the twin forces of higher oil prices and a weaker dollar.

Weighing on the dollar was the outlook for lower borrowing rates versus those of other economies when a two-day meeting of the Fed concludes on Wednesday.

Investors in Fed funds futures have largely priced in a 25 basis point cut in the 4.75 per cent overnight rate amid a deteriorating housing market and recent large write-downs at US banks.

“The Fed faces a quandary as they need to ease [rates] in order to get the economy going, but a weaker dollar, while good for US exports, does raise the concern that inflation will rise,” said Gerald Lucas, senior investment adviser at Deutsche Bank.

Higher commodity and energy stocks propelled global equity markets while US multinational companies were buoyed by further weakness in the dollar.

In early afternoon trade on Wall Street, the S&P 500 was up 0.3 per cent. The FTSE Eurofirst 300 index rose 0.7 per cent.

Asian markets rose sharply. Markets in India, Hong Kong, South Korea, Malaysia and Indonesia set record highs. The Hang Seng rose 3.9 per cent and is up 55 per cent since the Fed cut its discount rate for banks and China said it would allow investors to buy Hong Kong stocks.

The dollar fell to a record low of 76.777 against a basket of six major currencies, as the euro climbed to a new high of $1.4438.

Copyright The Financial Times Limited 2007