(Updates with quotes, prices after Fed rate cut)
By Atul Prakash
LONDON, Jan 22 (Reuters) - Gold bounced back from three-week
lows on Tuesday as the dollar tumbled against the euro after the
U.S. Federal Reserve unexpectedly slashed interest rates by 75
basis points.
Spot gold <XAU=> rose as high as $874.65 an ounce in
volatile trading and was quoted at $872.90/873.60 by 1349 GMT,
against $867.10/867.80 in late European trade on Monday. It fell
as low as $849.50 earlier in the day.
"Gold was already showing signs of recovery before the Fed's
move, but all the precious metals are now well bid. The euro is
up over 1 percent from its intra-day low and some degree of
relative normality is returning to equities," said Tom Kendall,
metals strategist at Mitsubishi Corporation.
"It is a bit risky to say that we are out of the woods
completely as far as the correction in gold goes, but it
certainly looks that way and $890 is the first meaningful
target."
The dollar fell sharply against the euro after the Fed
unexpectedly slashed its benchmark overnight lending rate in a
bid to allay market fears about a U.S. recession.
The Fed's emergency move, precipitated by a global equities
market rout, has wiped out the dollar's yield advantage over the
euro. The Fed funds rate target is now at 3.5 percent.
The Fed's move helped U.S. stock index futures cut losses,
but some analysts said the step was a sign of panic on the part
on monetary authorities.
A rate cut prompts investors to switch to alternative
assets, including gold. A gloomy economic picture also often
helps the metal, traditionally seen as a safe-haven asset that
generally moves in the opposite direction of the dollar.
"They (Fed) must know of something going on and things are a
lot worse than even the worst bears had thought, that the
economy really is in recession going from bad to worse," said
Robin Bhar, metals analyst at UBS Investment Bank.
"This smacks of panic and desperation, but is obviously
bullish for gold as interest rate cuts make gold more
attractive," he said.
MARKET STILL NERVOUS
But investors remained nervous about the global economic
outlook.
Comments from IMF Managing Director Dominique Strauss-Kahn
on Monday that all developed countries were suffering from the
U.S. slowdown entrenched fears that global growth was hitting a
wall.
Adding to the gloom, billionaire investor George Soros said
the world was facing the worst financial crisis since World War
II and the United States was threatened with recession.
In other bullion markets, U.S. gold futures sharply cut
losses after the Fed move. The most active February contract was
down $10.70 at $871.10 an ounce after falling below $850.
Other precious metals also rebounded, with platinum rising
as high as $1,544.50 before falling to $1,535.50/1,540.50 an
ounce. It earlier hit a 1-month low of $1,507, against
$1,539.50/1,544.50 in Europe late on Monday.
Silver <XAG=> rose to $15.71/15.76 an ounce from
$15.61/15.66, but palladium was down at $360.50/365.50, versus
$363/368 an ounce a day earlier.
(Additional reporting by Veronica Brown in London and Chikafumi
Hodo in Tokyo)
(Reporting by Atul Prakash; editing by Veronica Brown)
