Gold slumps, dollar soars as China hikes key rates

Gold prices slid by nearly 2 per cent today and markets were generally in a tizzy after China said it was raising its benchmark interest rates by 25 basis points.

Gold futures fell to $1,350 an ounce, the most since July, as the unexpected interest-rate increase by China spurred gains for the dollar, curbing demand for bullion as an alternative investment.

The greenback jumped as much as 1.5 percent against a six-currency basket.

Before today, gold rallied 25 percent this year, touching a record $1,388.10 an ounce on 14 October, as central banks around the world kept interest rates low to revive the global economy.

China's interest rate hike sent shockwaves through the currency markets, sparking a sell-off in perceived riskier currencies. The US dollar soared as a result, even as other commodity-linked currencies, most notably the Australian dollar, fell hard. The euro too extended losses against the dollar on the news. 

The People's Bank of China surprised markets by raising its benchmark one-year lending and deposit rate by 25 basis points effective from 20 October, the first rate increase in nearly three years. 

Commodity markets were also shaken - copper fell from a 27-month high after China, the biggest consumer of the metal, increased its lending and deposit rates to curb inflation. 

China's inflation quickened its pace to 3.5 per cent in August, the fastest growth in 22 months. Other industrial metals also retreated.