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Gold gains, dollar drops after Fed balance sheet comments

Gold pushed higher and the dollar fell after the Federal Reserve held interest rates steady as widely expected and signalled that it was ready to start gradually shrinking its $4.5tn balance sheet.

Gold, which had been trading in the red for most of the day, jumped 0.5 per cent to $1,255.72 per troy ounce on the news. The dollar, as measured by the DXY index, gave up a smaller gain to trade 0.3 per cent lower.

“The big news was the revelation that balance sheet normalization is now slated to begin ‘relatively soon’, as opposed to sometime ‘this year’, which was the previous timeframe,” said Joshua Shapiro, chief US economist at MFR. “This seems to be a reasonably clear signal that the normalization process is going to be announced at the next FOMC meeting in September and then would be likely to actually begin shortly thereafter.”

The reaction in the stock market was more muted however, with the S&P 500 coming off its session low to trade 0.1 per cent higher. The Dow Jones Industrial Average also received a similar lift to trade up 0.4 per cent while the Nasdaq Composite quickly gave up its brief gains to trade just 0.1 per cent higher.

Elsewhere, the yield on the 10-year Treasury note dropped 3 basis points from 2.32 per cent to 2.29 per cent after the Fed decision.