Gold hits record, euro down on EU plan skepticism

NEW YORK Tue May 11, 2010 5:12pm EDT

A dealer works on the trading floor at IG Index in London May 10, 2010. REUTERS/Suzanne Plunkett

A dealer works on the trading floor at IG Index in London May 10, 2010.

Credit: Reuters/Suzanne Plunkett

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NEW YORK (Reuters) - Gold surged nearly 3 percent to a record high on Tuesday as investor skepticism overran the initial euphoria of Europe's $1 trillion euro zone rescue plan, knocking the euro down and pulling most global share prices lower.

Concerns that the efforts to backstop the euro zone currency are only a short-term fix rather than a long-term solution drove the flight from riskier assets.

The safe-haven flows into gold overcame the rise in the U.S. dollar, which increases the cost of commodities for buyers in other currencies. Spot gold traded up $28.90, or 2.40 percent, to $1,230.80, after hitting a record high of $1,233.65.

"There's still a good amount of skepticism about whether or not the support plan works, whether or not European governments are ready to do the hard part of it and implement this austerity program," said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.

At the close, the Dow Jones industrial average .DJI fell 36.88 points, or 0.34 percent, to 10,748.26. The Standard & Poor's 500 Index .SPX lost 3.94 points, or 0.34 percent, to 1,155.79.

The Nasdaq Composite Index .IXIC eked out a razor-thin gain, rising 0.64 point, or 0.03 percent, to 2,375.31, helped by gains in biotechnology and computer-related stocks.

Gold stocks surged with the rise in the price of the precious metal. The Arca Gold bugs Index .HUI, which measures the performance of 15 gold miners' stocks, surged 6 percent.

Helping Nasdaq and the biotech sector, Gilead Sciences (GILD.O) unveiled a large stock-buyback program. Its shares rose 2.3 percent to $39.62. The NYSE Arca Biotech index .BTK gained 0.5 percent.

Banking shares stalled after surging on Monday. The S&P financial index .GSPF shed 0.48 percent.

Stocks scored their biggest one-day gain in more than a year on Monday.

The FTSEurofirst 300 .FTEU3 index of top European shares closed down 0.38 percent, after Monday's 7.39 percent advance. Bank stocks, which had led on Monday, fell, with the STOXX Europe 600 banking index .SX7P down 1.8 percent.

In Asia, Chinese stocks .SSEC fell 1.9 percent to their lowest level in a year on a worsening inflation outlook. Chinese inflation rose to an 18-month high in April, increasing concerns the government still has its work cut out to keep the world's third-largest economy from boiling over.

MSCI's all-country world index .MIWD00000PUS cut losses, falling 0.7 percent. Emerging stocks .MSCIEF dipped 0.82 percent.

EURO RUCTIONS

German Chancellor Angela Merkel's cabinet on Tuesday backed plans to contribute 123 billion euros in loan guarantees to support the euro currency. However, opposition lawmakers warned it had yet to decide if it backed the rescue plan.

The euro fell 0.82 percent to $1.2676 after Monday's initial push to $1.31.

"We realize now that this is just another way of delaying perhaps the inevitable," said Shaun Osborne, chief FX strategist at TD Securities in Toronto. "It pushes the debt problems further down the road."

The greenback rose 0.46 percent against a basket of major trading partner currencies .DXY.

Sterling rose after Conservative party leader David Cameron took over as Britain's prime minister and said he would form a coalition government. Sterling was up 0.7 percent to $1.4955, off earlier highs above $1.50. The pound last week had fallen to a one-year against the U.S. dollar on fear of a political stalemate after an inconclusive UK election.

DEBT FLAT

In a sobering note, the International Monetary Fund said that even though Greece's public debt was sustainable over the medium term, the nation faced plenty of risks.

Moody's credit ratings agency also warned on Monday that it might downgrade Portugal's debt rating and further cut Greece's to junk status, noting the contagion effect of Greece's crisis on other euro zone members.

The unsettled German political scene left Bunds to languish. They recouped less than half of Monday's drop, when they suffered amid euphoria for riskier debt issuers following the announcement of the European rescue package.

The June Bund future was up 20 ticks on the day at 125.69 but off its session high at 126.29.

Ten-year Greek bond yields fell by around 50 basis points to 7.7 percent, squeezing the spread against German bond yields slightly tighter on the day to 477 bps as investors opted to hold rather than sell the bonds.

Volatile trade left U.S. Treasuries little changed. Solid demand for three-year notes was offset by the euro zone concerns. A further $40 billion in issuance is due this week.

Benchmark 10-year U.S. Treasuries rose 1/32 of a point in price, yielding 3.53 percent.

U.S. light sweet crude oil settled down 43 cents, or 0.56 percent, to $76.37 per barrel.

(Additional reporting by Edward Krudy, Steven C. Johnson, Ryan Vlastelica, Wanfeng Zhou in New York, Blaise Robinson in Paris, Rebekah Curtis, Harpreet Bhal, Jan Harvey, and George Matlock in London; Editing by Leslie Adler)

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