The United States on Tuesday warned China that any wavering in its commitment to a more market-determined exchange rate would be “troubling”, though a U.S. Treasury official said it was unclear if this yuan devaluation marked such a step. The metal lost almost 7 percent in July, when it also touched its cheapest since 2010 at $1,077.
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Policy makers have kept the US benchmark interest rate near zero since 2008 to support the world’s largest economy.
That could limit gold’s upside potential.
Gold for December delivery, the most actively traded contract, added $3.60 or 0.3 percent, to settle at $1,107.70 an ounce, on the Comex division of the New York Mercantile Exchange on Tuesday. After crossing the key $1,110 level earlier this week, gold has climbed to a three-week high. Gold has been hit by expectations that the Fed would lift rates this year for the first time since 2006.
“While the move by the PBOC highlights the risks to the US outlook, we retain our call for a September hike, but believe the probability has fallen somewhat, as the move may raise FOMC concerns about global growth and inflation pressures”, strategists at Barclays said.
The Aussie, widely considered a more liquid proxy for China plays, was last up 0.71 percent against the dollar at $0.7353, after plunging to $0.7217, its lowest since mid-2009.
The euro was up 1.17 percent against the dollar at $1.11710. The strength in the precious metals during yesterday’s trade was also aided by the weakness in the US dollar, as the US dollar-denominated metals became more attractive for foreign investors.
Traders are pricing in a 52 per cent probability that the Fed will raise interest rates in September, based on the assumption that the effective fed funds rate will average 0.375 per cent after the first increase.
Spot silver dropped 0.3 per cent to $15.23 an ounce after hitting a one-month high on Tuesday.
The yuan extended its losses, dragging the growth-linked Australian and New Zealand dollars to six-year lows with it, while another set of disappointing Chinese data bolstered safe-haven currencies such as the yen.
The U.S. dollar rose to 125.28 yen, its highest level since June 8, before weakening to Y125.24 around 0450 GMT.
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In fall 2014 and spring 2015, gold was driven by the broad commodity sell-off, especially the drastic plunge of oil prices which was fueled by the stronger dollar, along with concerns over China’s slowdown. “We still expect the interest rates in the U.S., and the dollar, to (provide that)”, Boele said. At the moment, it appears as though faith in the omnipotence and infallibility of central banks is at an all-time high.
