Gold at record, dollar down as Fed holds on rates

NEW YORK (Reuters) - Gold reached a record high on Wednesday after the Federal Reserve left near-zero benchmark U.S. interest rates unchanged, prompting a sell-off of the dollar as investors looked elsewhere for higher-yielding assets.

The Fed expressed confidence the economic recovery was gaining traction but stuck to its commitment to keep borrowing costs near zero for "an extended period."

The Fed's announcement gave investors few reasons to boost their stock holdings. U.S. equity prices dropped in late trade after an early rise provided by upbeat European and U.S. economic reports lost steam.

"This doesn't change much. It's hard to figure out how this could be helpful for the upside, though it easily could have been negative," said Jordan Posner, portfolio manager at Matrix Asset Advisors in New York.

"The good news is more an absence of anything bad," he said.

The rally in gold came after India bought half of the 400 tons of gold the International Monetary Fund put up for sale, for $6.7 billion, drawing speculation of what country would be next.

Spot gold hit a record high of $1,097.25 an ounce after the Fed's statement pushed the dollar lower. The lingering impact of the IMF's gold sale to India was also seen as a factor.

"There is a long list of central banks which have very low gold reserve ratios, and in aggregate central banks should be net buyers of gold over the next year for the first time in 20 years," said Michael Lewis, head of commodities research at Deutsche Bank.

Longer-dated U.S. Treasury debt prices fell on worries over massive amounts of pending government debt supply. With the Fed's decision out of the way, investors focused on the pending sale of $81 billion in notes and bonds next week.

At the close of trade, the Dow Jones industrial average .DJI was up 30.23 points, or 0.31 percent, at 9,802.14. The Standard & Poor's 500 Index .SPX was up 1.09 points, or 0.10 percent, at 1,046.50. The Nasdaq Composite Index .IXIC fell 1.80 points, or 0.09 percent, to 2,055.52.

The MSCI world equity index .MIWD00000PUS rose 1.21 percent to 285.10 while the FTSEurofirst 300 index .FTEU3 gained 1.6 percent to 984.64. Emerging market stocks .MSCIEF rose 2.51 percent.

The dollar fell against the euro and a basket of currencies on Wednesday as firmer equity and commodity prices suggested increased investor confidence, reducing demand for the U.S. unit as a haven from risk.

The U.S. dollar index .DXY declined 0.81 percent to 75.771. The euro gained 1.02 percent to $1.4864. The dollar rose 0.46 percent against the yen to 90.75 yen.

In the bond market, benchmark 10-year U.S. Treasury prices fell nearly half a point in price, driving the yield up to 3.5218 percent. Euro zone interest rate sensitive short-dated bond yields rose 6 basis points to 1.326 percent, while 10-year yields were 4 basis points higher at 2.468 percent.

Both the European Central Bank and the Bank of England announce interest rate policy decisions on Thursday. The ECB is seen leaving interest rates unchanged while BoE policymakers face a tough decision over whether or not to extend a 175 billion pound asset purchase program.

U.S. crude oil settled up 80 cents, or 1.01 percent, to $80.40 a barrel, below the day's high of $81.06.

DATA'S EARLY INFLUENCE

The early trading hours on Wednesday felt the positive impact from a smattering of economic data.

U.S. stock indexes jumped after an employee services company reported U.S. firms fired workers in October at the slowest pace in more than a year, raising chances job growth could reappear in early 2010.

Gains extended after the Institute of Supply Management, a business group, in its monthly survey found activity in U.S. service businesses rose for a second straight month.

In Europe, a survey showed its dominant service sector expanded for the second consecutive month and at the fastest pace in 22 months. That was tempered by data showing Germany's service sector expanded at its slowest rate in three months.

Markit's final euro zone services purchasing managers' index of around 2,000 companies rose in October to 52.6, its highest reading since December 2007, up from 50.9 in September. It was revised up from forecasts and a flash reading of 52.3.

(Additional reporting by Albert Yoon, Gertrude Chavez-Dreyfuss, Chris Reese and Chuck Mikolajczak in New York, Natsuko Waki, Jan Harvey, and Kirsten Donovan in London; Editing by Dan Grebler)