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Financial Times: Dollar and oil hit new records

By Michael Mackenzie in New York
Published: October 29 2007 20:20 | Last updated: October 30 2007 01:12

Oil hit a new record high of $93.80 and the dollar struck a new low yesterday 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 price 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 writedowns 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.

“We have seen a strong preference for energy stocks among institutional investors,” said Saul Henry, head of US equity strategy at State Street Global Markets.

By the close on Wall Street, the S&P 500 was up 0.4 per cent. The FTSE Eurofirst 300 index closed 0.7 per cent higher, and the FTSE 100 closed up 0.67 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 leading currencies, as the euro climbed to a new high of $1.4438. The dollar fell as low as C$0.9541 against its Canadian counterpart, its lowest level in 47 years.

“With oil prices so high, oil exporters are diversifying more of their petro-dollar surplus into other currencies and that process pressures the dollar and benefits currencies such as the euro,” said Mr Lucas. “While a healthy percentage of reserves still goes into dollar assets”, oil’s rise was one factor in dollar weakness.

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