Gold drops 2 pct after Fed cuts less than expected

By Lewa Pardomuan

SINGAPORE (Reuters) - Gold fell more than 2 percent on Wednesday after a less than expected 75 basis points interest rate cut by the U.S. Federal Reserve boosted the dollar, lifted stocks and dimmed bullion's appeal as an alternative investment.

But bullion's drop stirred up trade in the physical sector, with jewellers in the region purchasing gold bars from dealers in Singapore, a centre for bullion trading in Southeast Asia.

Gold hit a low of $980.80 ounce, down from $1,002.30/1,003.10 an ounce late in New York on Tuesday, when it tumbled to its lowest in nearly a week at $977.80. It struck a record at $1,030.80 an ounce on Monday.

Gold has risen more than 23 percent in 2008 on fears of inflation as crude oil hit records, hopes of further rate cuts and deepening U.S. financial concerns. Some investors had bet the Fed could cut by as much as 100 basis points.

"Whilst bullion prices may have suffered overnight, in the longer term the increasing threat of inflation will help to support prices and could drive it back towards its recent all-time high," said Investec Australia in a daily report.

Silver and palladium hovered below recent highs. Platinum was well below its record high but still supported by disruptions in power supply in main producer South Africa.

The dollar dropped against the yen on Wednesday as investors booked profits a day after the U.S. currency posted its biggest one-day gain against the yen in a decade after the Fed rate cut.

Lower rates typically reduce the attractiveness of dollar-denominated securities and curb demand for the dollars to buy them. Japan's Nikkei share average jumped 2.8 percent to track gains on Wall Street after the interest rate cut.