(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, March 20 (Reuters) - Gold and oil fell sharply on
Thursday as investors dumped commodities and lifted U.S. stocks
to big gains on the view that inflation could moderate if the
selling pressure in futures markets continues.
The dollar jumped to a week-high against the euro as
investors fleeing commodities repatriated their cash into the
beleaguered U.S. currency. A sagging dollar this year has given
a major lift to commodities denominated in the U.S. currency.
Treasury debt prices mostly slipped but the shortest-dated
government instruments rallied again amid a powerful safe-haven
bid on the exodus out of commodities.
European stocks pared losses, bolstered by gains on Wall
Street following a better-than-expected survey on factory
activity in the U.S. mid-Atlantic region. But commodity-related
stocks and banking shares kept indexes in negative territory.
Oil initially fell below $100 a barrel for the first time
in two weeks, extending a hefty sell-off the previous day on
growing concerns that a slowdown in top consumer the United
States would undermine global demand for energy.
"We continue to see profit-taking among commodities. There
are also macro-economic concerns about the economy and the
dollar has been doing better," said Mike Wittner, global head
of oil market research in London for Societe Generale.
Oil, gold and other commodities had been hitting a series
of record highs this year as investors took refuge in
dollar-denominated assets amid the carnage in stock markets.
Crude oil <CLc1> hit a record $111.80 a barrel on Tuesday
and gold hit a record $1,030.80 an ounce on Monday. U.S. crude
<CLc1> settled down 70 cents to $101.84 a barrel after falling
as low as $98.65 earlier, the first time below the $100 level
since March 5.
Gold, after hitting an all time high over $1,000 this week.continued its decline, shedding 3 percent of its value. Spot
gold <XAU=> bottomed at a two-month low of $904.65 and last
traded $920.30/921.10 an ounce in New York.
Investors nervous about weakening demand in a sagging
economy are cashing in on the recent record prices. Oil and
gold both fell more than 10 percent since hitting records
earlier in the week.
As investors slashed their "long" exposure to commodities,
they covered "short" positions in the dollar, which lifted the
currency from historic lows charted earlier this week.
"Commodity markets and currencies are very interconnected
and as we see the system deleverage positions in oil and gold,
the dollar is bouncing back," said Camilla Sutton, a currency
strategist at Scotia Capital in Toronto.
U.S. stocks rallied more than 2 percent as crude's fall
helped relieve worries about the effect of higher prices on
consumers and businesses. Shares of retailer Wal-Mart Stores
Inc <WMT.N> rose 4.82 percent to $53.23.
Stocks, which had fallen in Europe, were buoyed early in
the day by the survey from the Philadelphia Federal Reserve
Bank showing factory activity in the U.S. Mid-Atlantic region
shrank for the fourth consecutive month in March, but not as
steeply as some expected.
Mortgage lenders Fannie Mae and Freddie Mac surged a third
day on hopes they will stabilize the depressed U.S. housing
market after the government moved this week to ease their
capital restrictions.
Freddie Mac gained 8.96 percent to $32.58, while Fannie Mae
rose 11.69 percent to $34.30.
Shares of Merrill Lynch & Co Inc <MER.N> climbed 13 percent
amid speculation the world's largest brokerage aimed to sell
assets, a move that could shore up its balance sheet in the
wake of the recent collapse and forced buyout of Bear Stearns
Cos <BSC.N>.
The Dow Jones industrial average <> closed up 261.66
points, or 2.16 percent, at 12,361.32. The Standard & Poor's
500 Index <.SPX> was up 31.09 points, or 2.39 percent, at
1,329.51. The Nasdaq Composite Index <> was up 48.15
points, or 2.18 percent, at 2,258.11.
European shares pared losses on the Philly Fed survey, but
closed lower. The FTSEurofirst 300 <> index of top
European shares closed 0.3 percent lower at 1,227.03 points.
Credit Suisse <CSGN.VX>, which issued a profit warning,
fell 6.7 percent, Total <TOTF.PA> lost 2.2 percent and Rio
Tinto <RIO.L> shed 5.3 percent.
Credit Suisse said big debt write-downs and tough markets
made it unlikely that the bank would be profitable in the first
quarter. But it did say the surprise trading hit it announced
in February was not as bad as previously thought.
The Philly Fed report helped the dollar to extend gains
versus the yen and the euro.
The euro was down about 1.4 percent at $1.531, well off
Monday's record $1.5904, chalking up its steepest one-day fall
since early February.
The dollar erased earlier gains versus the yen and last
traded little changed at 98.78 yen <JPY=>.
The stock rally drew some investors away from bonds even as
a flight safety drove U.S. Treasury bill rates down to levels
not seen since the 1950s.
Most Treasuries prices were lower when the bond market
closed early ahead of a three-day holiday weekend.
Demand for Treasury bills came from investors looking for a
safe spot to park cash over the long weekend, and showed both
the premium being put on safety and nagging investor fears.
"People hiding in T-bills when they're not earning any
interest shows a high perception of risk," said Jane Caron,
senior vice president and chief economic strategist at Dwight
Asset Management in Burlington, Vermont.
The benchmark 10-year U.S. Treasury note was down 4/32,
with the yield at 3.3428 percent.
In Asia, resource and mining stocks fell, while renewed
credit crisis fears also dragged down indexes across the region
a day after investors had cheered hefty U.S. interest rate cuts
and resilient results from leading U.S. investment banks.
MSCI's measure of Asian stocks outside Japan
<.MIAPJ0000PUS> fell 2.19 percent.
Key stock market indexes in Australia <> and Hong Kong
<> dropped more than 3 percent as resource firms such as
BHP Billiton <BHP.AX>, the biggest miner, and Petrochina
<0857.HK>, the most valuable energy producer, slumped.
Markets in Japan and other Asian countries were closed for
holidays, and many markets will remain closed on Friday.
(Editing by Richard Satran)
