Gold slumps as dollar hits 1-week peak on Fed's upbeat economic view

Gold prices plunged more than 1 percent as the greenback surged after the U.S. Federal Reserve pledged to keep interest rates low for a long time but stopped short of offering concrete signals on further stimulus.

Spot gold was trading 1.02 percent down at $1,939.65 per ounce by 0940 GMT, having hit a high of $1973.78 on Wednesday, its highest since September 2.  U.S. gold futures eased 1.25 percent to $1,945.90.

The Federal Reserve on Wednesday kept interest rates near zero and said it expects the U.S. economic recovery from the coronavirus crisis to accelerate with unemployment falling faster than the central bank's forecast in June.

The Fed said it would keep rates near zero until inflation moderately exceeds the U.S. central bank’s 2 percent inflation target. New economic projections released with the policy statement showed most policymakers see interest rates on hold through to at least 2023, with inflation not breaching 2 percent over that period.

The new economic projections also showed policymakers see the economic growth dropping 3.7 this year, far less than the 6.5 percent decline projected in June, while unemployment, which registered 8.4 percent in August, declining to 7.6 percent by the end of the year.

The dollar index rose to a more than 1-week high against its rivals following the Fed's comments, although data showing U.S. consumer spending slowed in August indicated a stall in economic recovery from the pandemic-induced slump.  

U.S. consumer spending slowed in August, as extended unemployment benefits were cut for millions of Americans, ramping up pressure on the White House and Congress to restart stalled negotiations for another fiscal package.

The greenback against a basket of currencies traded 0.1 percent up at 93.22, having touched a high of 93.59 earlier, its highest since September 9. The U.S. Treasury yields declined, with the benchmark 10-year note yield trading at 0.677 percent.

Markets now await the U.S. building permits, housing starts, unemployment benefit claims and Philadelphia Fed Manufacturing Survey due later in day for signs of recovery in the economy.