Gold hits 2-week low on strong dollar, down for week

By Clara Denina

LONDON (Reuters) - Gold fell to a two-week low on Friday and headed for a weekly drop as upbeat U.S. economic data lifted the dollar, raising anxiety over the Federal Reserve's future course.

The metal was headed for a 2.8 percent weekly drop, after climbing for two consecutive weeks, as expectations the U.S. Federal Reserve will maintain its economic stimulus seemed to have been factored in.

Spot gold was down 0.7 percent to $1,313.96 an ounce by 1244 GMT, extending Thursday's 1.4 percent slide. It earlier fell to the lowest level since October 22 at $1,311.50.

Comex gold futures for December fell $10.30 to $1,313.20 an ounce.

The euro plunged against the dollar after a sharp slowing in euro zone inflation left markets suddenly considering the outside chance of a cut in interest rates soon by the European Central Bank.

The dollar rose to two-week highs against a basket of currencies, in part due to a statement by the Federal Open Market Committee that was not as dovish on the timing of curbing stimulus as investors had expected

"The weakness we have been seeing in gold in the past two days is due to the after-effects of the FOMC statement and also the extremely low inflation rate in the euro zone," Commerzbank analyst Daniel Briesemann said.

"These factors are very supportive of the dollar, which in turn weighed on precious metals prices."

The dollar also got a boost from U.S. data showing the pace of business activity in the Midwest region had risen more than expected in October and weekly jobless claims declined, soothing some worries about sluggish fourth-quarter growth.

A stronger U.S. currency makes dollar-denominated assets such as gold more expensive for foreign investors.

FED FOCUS

Market focus remains heavily on U.S. monetary policy and how soon the Fed will begin tapering its $85 billion a month support programme.

Later on Friday, investors will closely monitor the U.S. ISM survey of manufacturing for October.

Prices had gained 8 percent, since hitting a three-month low in mid-October, after soft U.S. data last month and Washington's budget gridlock led investors to bet the Fed would postpone the tapering of its bullion-friendly stimulus measures.

As a gauge of investor sentiment, New York's SPDR Gold Trust, the biggest gold-backed ETF, reported an outflow of 34 tonnes in October, its biggest monthly drop since July. That brings its outflows for the year to 479 tonnes, or more than $20 billion this year. Holdings of the fund are near four-year lows of 872 tonnes.

Spot silver was unchanged at $21.85 an ounce after falling to its lowest since October 17 at $21.66 earlier in the day. It had fallen 3.5 percent on Thursday, its biggest one-day loss in a month.

The biggest silver ETF, the iShares Silver Trust, also recorded a monthly outflow of 127.4 tonnes in October, its first since June.

Spot platinum was up 0.2 percent at $1,451.74 an ounce, gaining modest support from news that 7,000 members of South Africa's National Union of Mineworkers will down tools at Northam Platinum on Sunday night in a strike over wages.

Spot palladium fell 0.4 percent at $732.00 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by James Jukwey and Jane Baird)

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Fed maintains strong stimulus as U.S. growth stumbles

By Pedro da Costa and Alister Bull

WASHINGTON (Reuters) - The Federal Reserve extended its support for a soft U.S. economy on Wednesday, sounding a bit less optimistic about growth as it announced plans to keep buying $85 billion in bonds per month.

In announcing the decision, the Fed nodded to weaker economic signals that have been due in part to a fiscal fight in Washington that shuttered much of the government for 16 days earlier this month.

The central bank noted that the recovery in the housing market had lost some steam and suggested some frustration at how slowly the labor market was healing.

However, it also dropped a phrase expressing concern about a run-up in borrowing costs, suggesting greater comfort with the current level of interest rates.

"Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months," the policy-setting Federal Open Market Committee said. "Fiscal policy is restraining economic growth."

The decision on bond buying was widely expected and the Fed's statement differed only slightly from the economic assessment it delivered after its last meeting in September.

U.S. stocks sold off slightly, while the dollar climbed against the euro and the yen. Prices of U.S. Treasuries turned negative, pushing yields higher.

"On balance, the Fed's statement was slightly less dovish than expected," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. He cited the central bank's abandonment of a phrase that expressed concern about an earlier tightening in financial conditions, including higher mortgage rates, which other economists also saw as fractionally hawkish.

Still, the Fed tempered its description of the labor market to take into account a recent weakening in jobs figures, saying only that there had been "some" further improvement.

"Until the economic data strengthens, and strengthens meaningfully, I think expectations for tapering (the bond purchases) are going to remain subdued," said Krishna Memani, chief investment officer at Oppenheimer Funds in New York.

He said there were only "modest" chances the Fed would reduce its buying at its next meeting in December.

NO TAPER

The Fed shocked financial markets last month by opting not to scale back its bond buying, after allowing a perception to harden over the summer that it was ready to start easing off on the stimulus. Its caution has since been vindicated.

Consumer and business confidence has been dented by the bitter political fight that triggered the government shutdown and pushed the nation to the brink of a harmful debt default, and a slew of recent data has pointed to economic weakness.

Reports on Wednesday showed U.S. private-sector employers hired the fewest number of workers in six months in October, while inflation stayed under wraps last month.

Other data on hiring, factory output and home sales in September had already suggested the economy lost a step even before the government shut down. Readings on consumer confidence this month have shown the fiscal standoff rattled households.

But policymakers made no direct reference to the budget showdown, which Paul Ashworth, chief U.S. economist at Capital Economics, saw as a telling omission.

"If officials are trying to downplay the impact of the shutdown and are happier with the level of long-term interest rates, then perhaps a December taper isn't quite as out of the question as we had previously thought," he said. "We still think sometime early next year is the most likely outcome, but the balance of risks just shifted a little."

In response to the deepest recession and weakest recovery in generations, the central bank lowered overnight interest rates to near zero in 2008 and more than quadrupled its balance sheet to $3.8 trillion through its bond purchases.

The Fed repeated on Wednesday that it would keep rates near zero as long as the jobless rate remained above 6.5 percent and inflation did not threaten to rise above 2.5 percent.

Traders of rate futures kept bets in place that the central bank will wait to raise rates until at least April 2015.

The response to the Fed's aggressive easing of monetary policy has not been uncontroversial, with some Fed hawks and many Republicans arguing there is a risk of runaway inflation or financial market bubbles.

One of those hawks, Kansas City Federal Reserve Bank President Esther George, dissented from the central bank's latest decision - as she has at every meeting this year - favoring a modest reduction in the pace of bond purchases.

In contrast, Fed Chairman Ben Bernanke and his presumptive successor, Vice Chair Janet Yellen, have argued that the threat of persistently high unemployment is the most pressing issue right now.

Data on Wednesday showed inflation over the past 12 months at just 1.2 percent, well below the central bank's 2 percent target.

(Reporting by Pedro da Costa and Alister Bull; Editing by Krista Hughes, Tim Ahmann and Andrea Ricci)

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Strong new orders lift China HSBC flash PMI to seven-month high in Oct

By Natalie Thomas

BEIJING (Reuters) - Strong new orders drove the fastest expansion in China's manufacturing sector in seven months in October, a preliminary survey showed on Thursday, more evidence that the economy is stabilising although a strong rebound remains elusive.

The flash PMI figure, the earliest reading of China's monthly economic performance, offers some positive news after disappointing export figures and September's manufacturing PMI, which had shown weak domestic demand.

The Markit/HSBC Purchasing Managers Index (PMI) stood at 50.9 in October, above September's final reading of 50.2 and marking a seven-month high. Ten of 11 sub-indices rose.

"China's growth recovery is becoming consolidated into the fourth quarter following the bottoming out in the third quarter" said Qu Hongbin an HSBC economist in a statement.

"This momentum is likely to continue in the coming months, creating favourable conditions for speeding up structural reforms."

New orders rose to 51.6, the highest in seven months and well above the 50 line separating expansion from contraction.

"From what we can see companies have drawn down inventories now, so once you get a little bit of demand you get orders coming in," said Stephen Green, an economist with Standard Chartered bank.

The strong reading lifted Chinese stocks off two-week lows, although investors are jittery about possible policy tightening by the central bank to put a cap on rising inflation and housing prices. Those fears have seen short-term money rates surge this week.

GRAPHIC

China's PMI and industrial output http://link.reuters.com/tus33v

GROWTH SEEN SLOWING

In the first nine months of the year, the $8.5 trillion economy grew 7.7 percent from a year earlier, putting it on track to achieve Beijing's 2013 target of 7.5 percent, which would be the weakest growth in 23 years.

Still, many economists see growth slowing ahead as global demand remains soft and as Beijing restructures the economy towards one driven more by consumer demand than investment and credit.

"Despite the rise of this flash PMI reading, we believe sequential GDP growth peaked in the third quarter at 2.2 percent and people should expect moderation to a more sustainable growth rate of 1.8-2.0 percent in the fourth quarter," said Ting Lu and economist with Bank of America-Merrill Lynch.

The government has repeatedly stated it will accept slower growth during the restructuring, but policymakers have also shown a willingness to step in to keep growth stable.

The flash PMI showed new export orders ticked up only marginally, suggesting a stabilisation in global demand but no solid rebound.

Exports unexpectedly fell 0.3 percent in September, as fears of a tapering in U.S. monetary stimulus weighed on demand from Southeast Asia. Exports were a drag on the economy in the first three quarters, subtracting 1.7 percentage points from growth [ID:nL4N0I202X]

Policymakers stated they would support the trade sector if it looked like missing an 8 percent growth target for this year.

Bank of America's Lu urged caution on attaching too much significance to the flash PMI figures.

"We should keep in mind that the HSBC flash PMI is quite volatile and the final reading could vary significantly from the flash," said Lu.

"The HSBC PMI has a quite small sample size with undisclosed number of missing values."

Last month's final PMI figures delivered a shock to the markets, coming in a full point below the flash reading for September.

The flash PMI is based on 85-90 percent of total responses for each month.

(Reporting By Natalie Thomas; Editing by Kim Coghill and John Mair)

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