The Federal Reserve slashed its benchmark interest rate 0.75 percentage point to 3.5 percent after global equity markets tumbled on concern the slumping U.S. economy will drag down the growth rates of other nations. Gold rallied 31 percent in 2007 after the Fed cut rates by 1 percentage point, sending the dollar down 9.5 percent against the euro.
``This is a pure dollar play if ever there was one,'' said Jon Nadler, an analyst at Kitco Minerals & Metals Inc. in Montreal.
Gold futures for February delivery climbed $8, or 0.9 percent, to $889.70 an ounce at 11:57 a.m. on the Comex division of the New York Mercantile Exchange. The price earlier fell as low as $849.50.
Gold for immediate delivery rose $24.22, or 2.8 percent, to $889.22. The price fell 2.1 percent yesterday, when the Comex was closed for Martin Luther King Jr. Day.
The rate cut was the biggest single reduction since the Fed began using the benchmark as the principal tool to control monetary policy in 1990. The dollar dropped as much as 1.3 percent against the euro.
``Lower interest rates are very good for gold because the dollar will weaken against other currencies,'' said Marty McNeill, a trader at R.F. Lafferty Inc. in New York.
Policy makers are scheduled to meet on Jan. 30. Interest- rate futures show a 70 percent chance the Fed will cut the benchmark rate 0.25 percentage point to 3.25 percent at that session, compared with no chance a week ago.
`Total Meltdown'
``At this point, the Fed looks like they're asset- senstive,'' said Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago. ``They're going to put liquidity in the market to keep stock prices higher and a total meltdown from happening.''
U.S. stocks tumbled for the fifth session with the Dow Jones Industrial Index plunging as much as 3.8 percent before paring losses. European stocks rose for the first time in six session after the Fed's surprise cut.
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